The latest revelations by the State Bank of Pakistan (SBP) about the relationship between public debt servicing and tax revenue is astonishing.

According to the data released by the SBP, in FY 11, public debt servicing (Rs 1.475 trillion) reached 90 percent of the tax revenues (Rs 1.6 trillion).

The scenario reflects rapid economic slide manifested by decreased bank credit availability to the private sector, falling output, supply shortages, business closures, higher unemployment, rising inflation, and weak investor confidence but, above all, it reflects on visionless fiscal management.

The fact that total debt servicing rose to Rs 1.475 trillion in FY11 compared to Rs 1.078 trillion in FY10 implies a 37.2 per cent increase in just one year.

Without repaying a single tranche of IMF’s standby facility by then, servicing of the principal of the external debt had risen to Rs 669bn from just Rs 400bn in FY10.

The cumulative effect of such fiscal management was that fiscal deficit crossed a record 6.4 percent of the GDP in FY11.

What is most worrisome is the fact that all that the government does is borrow (by end-November Rs 737bn), and starve the private sector – the real driver of economic growth.

While the shift to borrowing from the banking sector has helped cut borrowing from the SBP, and softened the IMF’s criticism thereof, it won’t contain inflation.

With reduced economic activity and supply shortages, consumer prices will rise.

With lower GDP growth, fiscal deficit could far exceed 6.4 percent registered last year.

Besides curtailing credit to the private sector, draining liquidity out of the system continuously forces SBP to inject liquidity into the banking sector.

Indirectly therefore, the SBP continues to fund the public debt (now via the banking sector) even though borrowing from the banking sector is almost at a standstill.

Even if SBP’s covert funding of public debt is set aside for a moment, the question is “what exactly is the high public debt delivering in terms of adding value to the economy?” The answer is “none, whatsoever”.

Proof: just look at the energy crisis, if nothing else, though all public services are in a mess.

High public debt can be justified if the borrowed funds add value to the economy – improvements in physical and social infrastructures that translate into long-term operational efficiencies for the economy, and help increase its productivity and job-creation capacity.

You find none of that happening.

But since money doesn’t evaporate, this contradiction builds suspicions about the integrity of the regime, and what turns these suspicions into belief are the almost daily disclosures about waste of tax revenue or its being pocketed by the high and mighty in the regime.

The latest of these disclosures was made by Sindh’s Information Minister when she revealed that salaries and benefits paid out to “ghost” employees in various departments of the provincial government amounted to over Rs 10bn in the last FY11.

The only plus was that, at last, this ongoing theft was discovered.

Such theft can’t go on without active role therein of the middle management of the involved departments.

But expectations about their being identified and given exemplary punishment and recovery of this huge amount would be unrealistically optimistic; such accountability is rare in Pakistan.

What amazes the Pakistanis is that, despite this pathetic performance, the top officeholders (named in Article 248 of the constitution) insist that the democracy they are practising, reflects ideal governance, and on top thereof, insist that they enjoy immunity from accountability.

Is this what democracy should deliver?

Should democracy become a mechanism for constitutionally sanctioned bad governance? What is shocking is that this proposition is being advocated vocally and defended in courts as the right of an elected regime (installed via suspect elections like the ones held in 2008).

The crippling malaise – record public debt – is debated only ceremonially.

The parliamentary opposition has yet to demand credible accountability of the regime on this subject, seek details of how the borrowed funds and tax revenue were spent, and how the regime proposes to reduce the economy-crippling public debt.

What is worse about the pile of debt accumulated by the regime is that the bulk of it is short-term, which keeps the state on the verge of default, and ensures that no other party thinks about taking over a near bankrupt state.

PML-N covers up its reluctance by demanding that the regime be allowed to complete its term.

The attitude reflects the concerns parliamentarians have over the mounting public debt.

Perhaps, they all will move to their secure havens (abroad) when Pakistan is declared bankrupt and its masses have to bear the brunt of the consequences thereof.

That scenario will unfold in the not too distant future.

In fact the second half of 2012 could prove a decisive period because the combined effect of trade deficit and increased burden of domestic and external debt servicing could cause the biggest overall resource deficit that will defy plugging.

Given its record (failure to impose VAT, tax agriculture, increase tax collection), the in-power regime would have no case to seek re-scheduling of the repayments by its external lenders.

What the IFIs think of the regime is manifested by the IMF’s refusal to issue its letter of comfort based on which other lenders could lend.

Even if the regime’s plans to muster $500 million by floating Euro bonds, another $500 million by floating Sukuk bonds, collecting the remaining $800 million from privatisation of PTCL and selling 3G telecom licenses for another $800 million do materialise, they would muster just about 20 percent of the requirements in 2012.

Where will the rest of the required external funds come from, is anybody’s guess.

This issue, now being raised repeatedly by the SBP (and occasionally by the Federal Finance Minister) doesn’t bother the parliamentarians; politicking is taking the better of their senses because that’s what they prioritise.

It is a pity that for four long years, the parliamentary opposition did nothing to push the regime to implement a credible austerity plan, prepare the loss-making state-owned enterprises for privatisation, boost the sentiment for saving, and thus make Pakistan attractive for foreign investment flows.

Now we (including the all powerful “establishment”) will face the consequences of our gross insensitivity to the clearly visible and continued economic chaos.

What the “democracy”, that we all tried hard to protect, will lead to is no longer a mystery.

In a near bankrupt state, the salaried “establishment” would be the worst off.

The colour of their attire (khaki or non-khaki) won’t make a difference; they all will be in it together.

But one thing is certain – democracy would be saved.

Three cheers for the current brand of democracy and its lovers!

Source: Business Recorder