The pile-up

[namaal]

The pile-up
Sunday, March 30, 2014

The State Bank of Pakistan (SBP), in a belated realization that the government is running up too much debt to finance its operations, has warned against the dangers of short-term default in its second quarterly report for the financial year. The government has been borrowing not only from the usual suspects at the IMF and the SBP but it has also resorted to taking loans from private commercial banks. As a one-time strategy to pay off ballooning expenses like the circular debt this may have made sense but only if it was accompanied by measures to prevent the debt from spiraling out of control. That, unfortunately, is yet to take place and the government continues paying off old debts by incurring new ones. The strategy for paying off at least a portion of these debts is a risky one. We rely on regular payments from the Coalition Support Fund but as the US winds down its military presence in Afghanistan it may need less assistance from us. Already the US is showing signs that it has priorities other than Pakistan, when Congress diverted $10 million that was meant to be sent to us under the Kerry-Lugar bill towards Ukraine.

The only other revenue-raising scheme that the government has in mind is the auctioning of 3G/4G licences. This bonanza, if it materializes, will be a one-time only occurrence and should not be dictating our budgetary needs. The IMF, of course, has its own agenda for how the government can wean itself off debt by taking in more money. It is pushing Pakistan to continually increase the prices of electricity and gas till it is no longer subsidized. Balancing our books on the backs of the long-suffering public is not an option the government should exercise. Instead it may want to heed another IMF recommendation to crack down on money laundering in the country. Former SBP governor Yaseen Anwar had admitted that as much as $25 million was being smuggled out of the country every day. This is precious foreign exchange that is not only leaving the country but has likely never been taxed. Beefing up our laws and enforcement against money laundering should be part of a general strategy to finally improve tax collection. Before even considering eliminating power subsidies, the government has to go after those who are not contributing their fair share. The government has to fund its operations from somewhere and a crackdown on the tax-dodging elite should replace the debt we have piled up.