Is fiscal house in order?

As the country steps into the latter half of 2011-12 fiscal year, the fiscal burden on its thin shoulders continues to grow. To plug the gap between revenues and spending, the cash-starved government has no other option but to heavily rely on the domestic sector, while external lenders remain tight-fisted. This is clear from SBPs data, portraying a net addition of Rs761 billion in the domestic debt pool during the first five months of the current fiscal year, as the total domestic debt reached Rs6779 billion at the end of November, 2011. The external borrowing doors stay closed, as evident from dismally low inflows in financial and capital accounts. The latest data is not available, but the external public debt level stood at $57.6 billion at the end of 1QFY11, virtually unchanged during the first three months of FY12. Accumulation of funds through sale of sovereign instruments to the private sector kept the governments wheel rolling, since the government has been shying away from borrowing from SBP, to curtail persistently high inflation. As a result, scheduled banks credit to the government sector (outstanding) through investments in government securities reached Rs2642 billion at the end of November, leading to a jump of Rs585 billion since the start of the current fiscal year. On the contrary, SBPs investments in government securities fell by Rs66 billion to Rs1299 billion. For the same reason, the cash-strapped government issued 3QFY12 auction calendar with an additional borrowing requirement of around Rs103 billion. This amount is in addition to Rs572 billion worth of treasury instruments the government is aiming to sell to meet the payment of sovereign instruments scheduled to mature in the third quarter. Debt from treasury securities, including T-bills (excluding T-bills held by SBP), PIBs and Ijarah Sukuks accounted for nearly 51 percent of the total domestic debt at the end of November, 2011, as opposed to 44 percent at the end of FY11. Reliance on credit from domestic private sector is having an adverse bearing on economic and industrial growth in the country, leading to crowding out of private sector investments and rise in unemployment. Above that, the real danger is stemming from a high cost of debt servicing, which will further derail public sector initiatives and raise inflationary pressures. Since the public debt as a percentage of GDP stood close to 60 percent at the end of FY11, which is at the ceiling level set under Debt Limitation Act 2005, there appears an urgent need to exercise strict vigilance in managing fiscal matters.