Pakistan has repaid $1 billion of foreign debt amid demand from a supreme body of the business community to probe a two-year-old decision of unjustifiable increase in interest rate which, according to it, has so far caused losses of Rs2.5 trillion to the exchequer.

The country on Wednesday settled $1 billion in debt that it had raised in October 2016 by floating international Sukuk at 5.5% return, according to officials of the Ministry of Finance.

The repayment will temporarily hit the largely debt-based foreign exchange reserves that are currently standing at around $19 billion.

The Ministry of Finance is also at an advanced stage to borrow another $1 billion by floating International Sukuk, said the officials. In recent months, the Pakistan Tehreek-e-Insaf (PTI) government has borrowed $3.5 billion by issuing sovereign bonds.

Meanwhile, the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) on Wednesday wrote a letter to Finance Minister Shaukat Tarin.

The apex business body asked Tarin to refrain from enhancing the tax burden on people and launch a high-level inquiry to find out who raised the interest rate to 13.25% about two years ago.

After the Federal Board of Revenue (FBR) exceeded the quarterly tax collection target by Rs187 billion, the business community, which pays most of the taxes, had expected a tax relief of equal measure for the industry and the general public, who bears the burden of indirect taxes, according to the FPCCI.

“It is disturbing for us to learn through press reports that the International Monetary Fund (IMF) has demanded imposition of taxes of Rs500 billion during the current financial year.” This shows a clear disconnect between the tax targets and fiscal management, it added.

The letter was co-signed by Younas Dagha, Chairman of Policy Advisory Board of the FPCCI and Nasser Hayat Maggo, President of the FPCCI.

“The industry of Pakistan is of the view that mismanagement of federal debt needs to be addressed rather than increasing the tax burden and restricting the economic growth,” said the FPCCI.

It added that the interest rate was unjustifiably jacked up to 13.25% when inflation stood at 8-9% at the beginning of the IMF programme. It derailed the economy and the country experienced negative growth for the first time after 1952.

Read Pakistan’s debt maturity profile shortens

“The decision to fix interest rate at 13.25% diverted an additional Rs1.1 trillion of taxpayers’ money into banks annually, which is almost equal to our defence budget, increasing our debt servicing to Rs2.71 trillion in 2019-20,” it added.

“A high-level inquiry should be conducted into the deliberate acts of debt mismanagement, which has cost the country’s taxpayers Rs2.5 trillion and it is still draining fiscal resources,” it said.

The FPCCI termed it surprising that under the watch of the IMF, the then finance minister unjustifiably took decisions to commit the federal government to higher interest for the next few years by re-profiling short-term loans to the longer term at very high rates despite expectation of lower rates in the coming years.

Banks witnessed up to 100% growth in their profits due to such decisions. The FPCCI urged Shaukat Tarin to renegotiate the debt deals signed with commercial banks to cut the cost of debt servicing.

“Such acts of debt mismanagement need to be reversed to address the fiscal needs.” Tarin has also time and again expressed his discomfort with the 2019 decision to fix the interest rate at 13.25% which, according to him, added a major debt burden to the fiscal framework of the country.

Dr Zubair Khan, a former IMF official, has also filed a petition in the Supreme Court of Pakistan, requesting it to probe those who set the high interest rate.

In April this year, the Supreme Court had admitted the petition for hearing. In his petition, Khan pleaded that the self-imposed decision to raise interest rate to 13.25% was avoidable and it was an “ill-designed exercise detrimental to the economic interests of Pakistan.”

A recent report of the Ministry of Finance stated that Pakistan’s public debt maturity profile shortened further in the last fiscal year due to more reliance on short-term loans, exposing the government to refinancing risks.

The finance ministry stated that the average time to maturity of domestic debt reduced further from four years and one month to just three and a half years.

Similarly, the average time of external debt maturity also deteriorated from last year’s level of seven years to six years and eight months.

Published in The Express Tribune, October 14th, 2021.

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