Floods, loan and debt - Ashfaque H Khan - Tuesday, August 24, 2010

Source : www.thenews.com.pk

Pakistan is currently witnessing one of the worst human tragedies in history. The unprecedented floods have rendered millions of Pakistanis homeless and destroyed their livelihoods. Thousands have lost their lives. The UN chief has appealed to the member states to help Pakistan recover from this tragedy. The World Bank and the Asian Development Bank have expressed readiness to provide billions of dollars as loan to Pakistan for rehabilitation and reconstruction of flood-hit areas. We should be thankful to them for standing with Pakistan in its hour of need.

While international institutions are willing to help Pakistan, are we doing enough to help ourselves? Are we really short of resources to address the challenges of rehabilitation and reconstruction? Should Pakistan accept loans from international institutions? Has our debt carrying capacity improved or deteriorated in recent years?

Let me first give some update on Pakistan's debt situation. Pakistan's public debt which stood at Rs4814 billion in June 2007, increased to Rs8913 billion by June 2010. In other words, we added Rs4099 billion debt in just three years. Similarly, external debt which stood at $40.3 billion in June 2007 rose to $55.6 billion in June 2010--an addition of $15.3 billion in three years. Thanks to Shaukat Tarin and his henchmen who drowned the country under debt. Such an act of reckless borrowing forced the current finance minister to mention in his budget speech the "indiscriminate borrowing" in recent past. As a result of unrestrained borrowing in the last 2-3 years, debt servicing alone consumed over 48 per cent of total revenue – up from 35 per cent in 2007.

Given the horrifying state of debt, should we accept the loan offer of WB, ADB and bilateral countries amounting billions of dollars? Do we need external assistance for flood-hit areas? My argument is that we have enough resources available in the budget 2010-11 which can easily be utilized for the purpose at hand.

Let me turn to budget 2010-11 and see how we can divert substantial resources for flood-hit areas. The government has allocated Rs.124 billion under 'other development expenditures' which includes Rs.50 billion for the Benazir Income Support Programme (BISP) and Rs45 billion for Internally Displaced People (IDPs). The allocations for BISP and IDPs are meant for the poor and displaced persons, hence Rs95 billion can easily be diverted for flood affectees. The government has also allocated Rs30 billion under the "Special Programme" which includes the People's Works Program I and II. These can also be diverted for the same purpose. Thus, Rs125 billion is available from the federal budget for flood affectees. The irrational increase (50 per cent) in the salary of government servants can also be reviewed and extra funds can also be diverted for flood-affected people.

A cursory look at the development budget (PSDP) will show that the provincial government can divert Rs173 billion from their provincial PSDP. The federal PSDP has already been slashed from Rs421 billion last year to Rs280 billion this year – a reduction of 33.5 per cent. On the contrary, the provincial PSDP surged from Rs200 billion to Rs373 billion in the same period, showing an increase of 86.5 per cent. This is the height of financial indiscipline on the part of provincial governments. How can PSDP be increased to such an extent when the country is passing through the most difficult period of its economic history? It appears that the provincial political leadership is totally oblivious to the gravity of the situation.

They have a chance to correct themselves by reviewing their budget priorities. One way to correct them is to freeze their PSDP at last year's level, that is, zero growth as apposed to a reduction in federal PSDP by 33.5 per cent. In doing so, the provincial governments can divert Rs173 billion for flood-affectees. By postponing the implementation of the irrational increase in the salary of the government servants, the provincial governments can also save several billions which can be utilised for flood-affectees.

Thus, federal and provincial governments together can divert Rs300 billion from the existing budget for the flood affected people. Postponing the implementation of the pay hike would release additional resources for the purpose. We are not short of resources. What is lacking is the will of the political leadership to tighten their belt. They don't want to disturb the allocations which would 'benefit' them. It is for this reason that they are further cutting the PSDP and are eager to borrow more resources from the international institutions to finance flood-related expenditures.

The international financial institutions must study the debt-carrying capacity of the country before committing billions of dollars. Pakistan is already a highly indebted country and additional lending for flood affectees would further aggravate the debt situation. As discussed above, Pakistan can easily mobilise over Rs300 billion or $3.5 billion in the current fiscal year from the existing budget. Give Pakistan a chance to become a fiscally responsible nation. Allow it to mobilise its own resources first and tighten its own belt. If there was a need for additional resources Pakistan would certainly turn to the WB and the ADB but at the moment the calculation suggests that Pakistan does not require additional billions of dollars.

The government must not seek additional loan from any quarter. We must encourage grant assistance and discourage even a soft loan. Pakistan has no capacity to carry more debt. We should say No with thanks to the international financial institutions. This is the time to reallocate resources from the existing budget. This is not the time to further cut the PSDP from already depleted level. We must learn to live as a proud nation and face the challenges boldly.

The writer is director general and dean at NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk

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