Scary fiscal deficit – don’t look at it

BR Research August 27, 2019

The country’s total debt and liabilities increased by 35 percent or Rs10.3 trillion in FY19 to reach Rs40.2 trillion – 104 percent of GDP. Out of it, around Rs2.8 trillion are added to due to currency depreciation, and Rs1.3 trillion SBP borrowing in June is being added in gross government debt. The fiscal deficit is estimated at 3.5 trillion (9.1% of GDP) for FY19 against revised number of 7.2 percent of GDP – highest ever deficit since FY79 (record is not available prior to that).

In-house calculation has been used to come up with the number using published data of SBP and MoF. According to some media reports, the fiscal deficit stood at 8.9 percent of GDP or Rs3.43 trillion. The 9.1 percent deficit is based on the provincial surplus of Rs59 billion in revised budget document, and the average monthly exchange rate is used in converting the net external debt in rupees. Either way, deficit as high as 8.9 percent of GDP was last reported in FY79 – this year’s number is easily 40-year high.

The domestic debt increased by Rs4.3 trillion in FY19, and the external debt increased by Rs3.3 trillion. The numbers are gross and overstated. For example, federal government in third week of June borrowed around Rs1.3 trillion from SBP to create a cushion for September end IMF target of net zero SBP borrowing. That money was kept as cash in government deposits – which increased by Rs1.26 trillion in FY19. Barring that, the net debt increase is Rs3.1 trillion.

On the external government debt, the toll increased by Rs3.3 trillion or 42 percent to Rs11.1 trillion in FY19. In terms of USD, the number is increased by $3.7 billion or 6 percent to $67.8 billion. Thus external debt in rupee terms is inflated due to 34 percent currency adjustment in FY19. Barring that, net foreign debt in rupee terms increased by Rs0.5 trillion (based on average rupee dollar parity in FY19).

But even after netting it off, the picture is still scary, and the challenge is massive. The fiscal deficit is too high, and that alone can devastate all the economic recovery through other measures of stabilization.

One may question the policy of keeping high interest rates which is increasing the fiscal deficit and in turn debt accumulation to repay it. The primary deficit is estimated at 3.9 percent in FY19 – in media reports, the number is reported at 3.6 percent. It is highly unlikely to get even close to the targeted 0.6 percent of GDP in FY20.

The debt trap is ready. The writing was on the wall. This space highlighted the debt trap issue back in 2014, when the CPEC started. But Ishaq Dar was not interested; and he followed his own policies.
Now this government is putting too much emphasis on monetary tightening and exchange rate adjustment under the name of stabilization. But there is no stabilization without bringing fiscal deficit in control, and this government is entering into dangerous territory. The fiscal deficit cannot be reduced without jacking up tax revenues and that cannot be done without reviving economic growth and that cannot be done with lowering interest rates. However, higher fiscal deficit would not let the SBP (read IMF) lower interest rates. Now that is some trap.

Copyright Business Recorder, 2019

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