Pakistan must live within its means
It is widely believed that Pakistan’s armed forces take away the lion’s share of the country’s budget. But the budget for the fiscal year starting July 2013 puts paid to this myth. The biggest line item in this budget is interest, which the country will pay on its domestic debt. The budget, announced last week by the new finance minister, envisions the total current spending of Rs 3,196 billion. Of this a whopping Rs 1,064 billion — about 33 percent — is for servicing domestic debt.
To put the interest payment number in perspective look at some of the other line items: On defense, Pakistan will spend in the coming year Rs 627 billion i.e. 20 percent of the budget. Repayment of foreign loans will take away Rs 367 billion i.e. about 12 percent. Running the civilian government will cost Rs 275 billion, or 9 percent. The amount allocated to education is Rs 59 billion, a mere 1.8 percent. And health and related services get Rs 9 billion that is a paltry 0.3 percent. In a country of 180 million, people that work out to a shocking Rs 50 per person, is barely enough to buy a packet of aspirin. Contrast this with Rs 6,000, which is each person’s share of the interest that will be paid to domestic banks, and the scale of the iniquity wrought on Pakistan’s people becomes clear.
The domestic interest payments that are so huge are due in large part to the untrammelled profligacy of the previous PPP government. Domestic debt rose over the 5-year period of PPP rule from Rs 3,860 billion to Rs 8,800 billion — an increase of 127 percent. Over the same period, external debt rose from Rs 4,155 billion to Rs 5,758 billion — some 38 percent. So total indebtedness rose from Rs 8,000 billion to Rs 14,560 billion, i.e. about 82 percent. Notice that domestic debt is about 60 percent of the total while the balance 40 percent is foreign debt. Yet interest payments on the foreign debt are Rs 89 billion compared to Rs 1069 billion on the domestic debt. This suggests an implied annual interest rate on foreign debt of 1.5 percent and on domestic debt of 12 percent. Clearly Pakistan’s domestic banks and their owners are making a fortune lending to the government.
These are disturbing numbers. When a third of the annual government budget goes to the country’s banks something is going seriously wrong. And the new budget does nothing to set things right. In fact it continues on the ultimately unsustainable path of more and more borrowing: The government will collect Rs 2,434 billion in revenue from internal sources — taxes and the likes. But it is planning to spend a total of Rs 3,985 billion (this includes current spending of Rs 3,196 billion and Rs 789 billion in development spending). The difference between revenue and total spending means that, incredibly, the government is planning to take Rs 1,551 billion in new loans.
The country must start to live within its means. Revenue has to be raised and a chainsaw put to expenses. On the revenue side, tax collection has to be improved. This is already a much-discussed issue. Pakistan has a tax to GDP ratio of 9 percent. India by contrast is 18 percent. Pakistan’s tax collection apparatus needs to be scrapped and built again from the ground up. Feudal landlords, each of whom possesses tens of thousands of acres of land, despite being ridiculously rich, pay no tax. This must change.
Financial collapse is a clear and imminent threat to Pakistan’s security. And this means that nothing should be exempted from the expense cutting chainsaw. The country’s leaders live in absurd extravagance. Some Rs 300 million a year are spent on running the president’s house alone. Add to it the expenses incurred in private jets for the prime minister and provincial chief ministers, and a picture of waste and unconscionable apathy in a desperately poor country begins to emerge. Defense — the second largest expense after interest payments — needs to be looked at. India spends 12 percent of its budget on defense. Pakistan 20 percent. Fundamental questions need to be asked. We have three quarters of a million men in uniform — one of the largest armies in the world. Should not the possession of a nuclear deterrence allow for a substantial reduction in conventional capability?
Ostriches may not actually bury their heads in the sand when confronted with an unpleasant reality. But the new PML-N government in preparing the budget has done something of the sort.
