DEBT MANAGEMENT PAKISTAN
Ques:
1. Major problem with fiscal policy and debt management in Pakistan?
Fiscal policy: Fiscal policy refers to the government's handling of the budget.
Usually fiscal policy is about spending as much as possible, thereby
stimulating the economy and increasing votes, without raising taxes. This has
led to an ongoing budget deficit and a huge debt. Like any budget, fiscal
policy guides two components:
1.
income
2.
spending
Major problem with
fiscal policy:-There
are signs that the Pak recession has run it course and that the aggressive
interest reductions of the past years have done their job. Nevertheless the
continuing spate of jobs losses, increase in corruption borrowing of debt from
IMF and other foreign sources has brought with it pleas that the Pak Assembly
should enact some combination of tax reductions and spending increases to
cushion the below. The major problem is that fiscal policy is made by the
politicians and that is why it is usually better to leave it alone.
The natural response to turn
calamities is to turn to government policy makers to help. When it comes to
recessions, the state bank of Pakistan is on the front line. One aspect of monetary
policy makers tasks it to ensure the stability of economic activity. Unlike al
the government actions interest rates can be changed literally overnight and
speedy actions are most effective. The problem is that the monetary policy is
very important tool for fighting recessions because everyone’s interest rate is
changed while only the modest numbers of business and consumer decision are
affected. Over the past 30 years we have to think of fiscal policy as an
equally important source of stimulus during a general slowdown. People turn to
their elected officials foe help demanding that they set things right with new
program that bring some combination of lower taxes and higher government
spending. It is important to distinguish the increases in payments to the
unemployed and lower income tax bills that automatically stabilize the economy
from discretionary fiscal policies put in place once the economy has slowed.
But just because something can work, but it does not follow automatically that
it will or that it is the right thing to do. There are two fundamental facts
with discretionary fiscal policy that are as follow.
1. It is slow.
2. It is almost impossible to do it
sensibly.
Initially, monetary policy and fiscal
policy were introduced in an economy where changes in these policies would
affect output. In reality, there is no real link between monetary policy and
real variables. That is, changes in monetary policy and fiscal policy cannot affect
the total level of output because the total level of output is determined by
the factors of production and not by monetary variables. This is called the
neutrality of money. Fiscal policy has a very important
affect on the division of total output. This is one major negative effect of
fiscal policy. Recall that the tools of fiscal policy are taxes and government
spending. When the government increases government spending, there should be an
indirect increase in output, as mitigated by the government spending
multiplier. In reality, government spending does not change output as the
government spending multiplier would seem to indicate. It does, instead,
significantly change the interest rate. A rise in the interest rate has a
strong affect on investment. That is, as the interest rate rises, investment
falls. This is because the interest rate is the opportunity cost of holding
money, and as this increases, taking out loans becomes relatively less
attractive.
When
the government increases spending, the interest rate rises and investment
falls. This is called crowding out. That is, increases in government spending
tend to replace, or crowd out, private investment. This works because the total
level of output is fixed by the factors of production, thus causing there
necessarily to be an equal and opposite change from an increase in government
purchases. Because investment is more sensitive to interest rates than either
consumption or net exports, investment takes the primary hit from the fiscal
policy change. For this reason, crowding out always occurs when expansionary
fiscal policy is used. In the long run, this crowding out may hamper economic
growth since investment affects the factors of production, which do affect
total output. When taxes decrease, consumption immediately rises because
disposable income rises. But, since total output is fixed by the factors of
production and government spending is fixed by fiscal policy, a change in
consumption is met by and equal and opposite change in investment. Here again
the case exists where a change in fiscal policy crowds out investment. In this
way, a tradeoff is created between the short run and long run effects of fiscal
policy upon the economy due to government spending and taxes replacing, or
crowding out, private investment.
Debt management:- Any strategy that helps a debtor to repay or otherwise handle their debt better. Debt management may involve working
with creditors to restructure debt or helping the debtor
manage payments more effectively. A debtor may appeal to a debt management
company if he/she does not know how to manage the debt himself/herself or if
there is so much debt that outside management becomes necessary.
Major
problem with debt management:- In principle the public
debts (Domestic and External) are raised for financing long term development
expenditure but in Pakistan these debts are being used for financing fiscal
deficits which invariably crop up due to imbalance in the revenue budgets.
* The developing countries like Pakistan, has
been forced to attract FDI because they are finding it extremely difficult to
service their growing external debt.
INTRODUCTION
The growing public debt and its servicing are
indeed very serious macroeconomic problems facing the economy, which lead to
high inflation, low savings, other sundry problems and causing a huge drain on
the national economic resources and must be reduced by debt retirement through
the proceeds of privatisation and improvement in public debt management.
In principle the public debts (Domestic and
External) are raised for financing long term development expenditure but in
Pakistan these debts are being used for financing fiscal deficits which
invariably crop up due to imbalance in the revenue budgets.
Fiscal Policy has been one of the weakest
areas of the macro-economic management in Pakistan in the recent past.
Persistent large budget deficits financed mainly by bank borrowings, had
created a liquidity overhang that contributed to demand pressures. The rise in
fiscal imbalance in the recent years is attributed to several factors. An
un-remitting increase in current expenditure is a marked feature of the fiscal
landscape, this is mainly due to large outlays for debt servicing and defense
expenditure, which together account for 81.42% of the current expenditure
(1995-96 budget) i.e. Debt Servicing amounting to Rs. 160 billion and defense
expenditure at Rs. 115 billion.
Another major weakness of the budgetary
policy is in the inelasticity of the revenue and a narrow tax base. Despite
significant discretionary measures taken over the years the tax/GDP ratio has
not improved remarkably. The successive fiscal imbalances reflect the fragility
of the resources base that underpins the budgetary policy. Domestic Debts have
grown rapidly in the recent past.
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