In scathing criticism of the government’s debt policy, a top economist has asked commercial banks to give dividends to Finance Minister Ishaq Dar.
According to the economist, this should be done as Dar has allegedly extended Rs130 billion additional benefits to banks due to wrong execution of the debt management policy.
“Dar deserves dividends from commercial banks for floating three-year Pakistan Investment Bonds (PIBs) at a time when the interest rates were coming down,” said Dr Ashfaque Hasan Khan, a member of the government-constituted Economic Advisory Council (EAC).
Khan was speaking on Wednesday at a seminar about the state of the economy.
He said that the government had devised a good strategy to increase the maturity of the domestic debt aimed at avoiding rollover risks. The government’s plan was to shift short-term debt to long-term but chose a time when interest rates were plummeting, said Khan.
He said the government concentrated heavily on three-year bonds instead of floating 10-, 20- and 30-year papers.
He said the weighted average cost of PIBs was 11.9% against T-Bills, which stood at 9.65% that translated into an additional Rs61 billion annual benefits to the commercial banks.
Due to further reduction in interest rates, commercial banks have been given additional benefits of Rs130 billion, he added.
“It is not sure whether the government did it advertently or due to lack of understanding,” said Khan, adding the commercial banks have enjoyed a bonanza of Rs130 billion.
While presenting statistics to substantiate his claim, Dr Khan said in June 2013, when the PML-N government came to power, the total volume of bonds was Rs1.3 trillion that increased to Rs3.952 trillion at the end of February. He said that at the end of April, an additional Rs2.7 trillion was added to the debt by issuing three-year bonds.
This helped the government reduce its short-term debt from 53% to 37% but it created a breathing space of just two years — as majority of the T-Bills, up to tenors of one year, were replaced with three-year PIBs. “But this has come at an enormous cost,” said Dr Khan.
He said that half of the additional Rs2.7 trillion will mature in June next year and the remaining half in the mid of 2017, providing little room at an exorbitant cost.
He alleged that the finance ministry was implementing a lender-driven borrowing policy.
Dr Khan advised the finance minister to avoid appointing a Director General (DG) Debt who is a treasurer by profession and serves the interests of banks instead of the government.
The present DG Debt was working with a commercial bank and has been brought to the Debt Management Office with support from the finance ministry.
Dr Khan also criticised the government for foreign borrowing sprees and said since taking office, the PML-N government taken on $14.2 billion in new loans and just $5.8 billion was disbursed till February this year.
“Due to ill-conceived debt and fiscal policies, Pakistan is in a debt trap,” said Dr Khan.
While speaking at the occasion, Pervez Tahir, who is a former chief economist of the planning commission, negated the feel-good impression created by foreign financial institutions and The Economist’s recent report on the economy.
“The real economic sector has not been picking up,” said Tahir. The large scale manufacturing sector also grew only 2% in the first seven months of the current fiscal year and both public and private sector investments were plummeting.
Despite lending rates falling to a 13-year low, the private sector credit was not picking up, said Tahir, adding, that the only silver lining was the Chinese investment that may contribute in increasing national output.