ARTICLE: We are surely heading for one of the most difficult budgets in the history of the country. Forget about the fiscal space as the liquidity crisis is severe while financial sector is stressed. Nothing can revive the economy except cash flow. Covid-19 has already caused a lot of damage. We have a poor history of bad fiscal management and economic complacency. This writer is identifying the areas and a couple of entries along with numbers, which need to be addressed and corrected.
In a COVID-19 pandemic situation, a plenty of cash has been withdrawn from banks resulting in a sharp increase in currency in circulation. Historical trends suggest getting back cash in the banking system is almost impossible.
The cause of big rise of individual cash holdings at a very fast pace was/is due to large size corrupt and undocumented transactions, which go unchecked due to 'friendly' fiscal policies.
The recipe is very simple: Stop all the talking and act quickly to unsettle the evaders. Demonetize Rs 1000 & Rs 500 currency notes and pardon hoarders by giving relief, as done earlier with overseas Pakistanis. Ask them to pay taxes based on the current tax structure with a 10% penalty.
While ensuring documentation of all future cash transactions of over Rs 100,000, Rs 200,000 per month ceiling is imposed on individual cash withdrawals.
The government must be aware that after the June 12 budget, the current administration will be required to present at least two more budgets. A cash-strapped government should be aware of the fact that due to pandemic, global economic conditions are unlikely to recover soon.
Therefore, ongoing challenging conditions will be extremely difficult to deal with unless Mother Nature decides to provide some respite to humans or a vaccine made available for the needy. Hence, ideally the government should go for a kill and make best use of the circumstances by taking tough measures that will start repaying before it complete its term:
Credit to private sector of Rs 288 billion (Very Low-Hinders Growth)
Schedule Banks' GOP Holdings Rs 7.929 trillion (cause of liquidity crunch)
Circular debt of Rs 2 trillion plus (too high)
Open Market Operations of Rs 1.44 trillion (cause of govt borrowings & liquidity crunch
Rs 6.371 trillion currency in circulation (Extremely High)
Net Govt Borrowings: Rs 12.33 trillion (FY19) - Rs 2.14 trillion (FY20) (alarming)
Rs 22.47 trillion domestic debt (very high, pushes debt higher)
$ 109.94 billion external debt (alarming)
$ 5.338 billion International Reserves/FC Liquidity (derivatives)
Rs 3.9 trillion tax collection (there will be no respite unless it is Rs 8 trillion or 20% of GDP)
Rs 2.5 trillion deficit financing plus (bring down below Rs 2 trillion)
Rs 3.47 trillion unfunded debt (unaccounted-worrisome)
(The writer is former Country Treasurer of Chase Manhattan Bank)
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