EDITORIAL: Prime Minister Imran Khan recently claimed that the government has engaged in zero borrowing during the first four months of the current year. This disturbingly is not reflected in the data recently released by the Finance Division titled Summary of Consolidated Federal and Provincial Budgetary Operations 2020-21 which indicates that domestic borrowing rose from 119.5 billion rupees July-September 2019-20 to 322.9 billion rupees in the comparable period of 2020-21 - a rise of 170 percent.
The Prime Minister's media handlers may rightly point out that the Prime Minister's major concern after he took over as the country's chief executive has been to repay markup and principal as and when due on past borrowings from abroad, a policy flaw that was proactively followed by the previous administration accounting for the historic high current account deficit of 20 billion dollars. However, the mention of the massive rise in domestic borrowing needs to be highlighted for two reasons.
First, this massive increase in reliance on domestic borrowing is a highly inflationary policy which merits a revisit if the government is to succeed in combating the prevailing inflationary spiral; and, secondly, the consequent rise in the budget deficit is reportedly now a source of concern for the International Monetary Fund (IMF) and one of the reasons for the delay in reaching the staff level agreement which is a precursor for the tranche release. It may be recalled that the IMF's Extended Fund Facility programme had originally focused on the primary balance, which does not take account of mark-up and repayment of principal as and when due, a focus that allowed the economic team to borrow with impunity; however, reports indicate that this is no longer the case.
Be that as it may, if the Prime Minister was referring to zero borrowing from external sources then too he was misinformed. The Summary of Consolidated Federal and Provincial Budgetary Operations 2020-21 indicates gross external financing of 402.6 billion rupees during July-September 2020-21 while the figure for the comparable period of 2019-20 was 470 billion rupees. However, this 68 billion rupee decline in the current year is disturbingly too little to take account of the fact that in the current year the Pakistan government opted to defer markup and principal repayment from official sources (allowed by the creditor nations to assist the developing countries deal with Covid19 crisis) - a deferral that as per the budget document was around 1.2 trillion rupees in the revised estimates of 2019-20 while the amount is zero in the current year.
The Summary further notes that repayment of external debt was to the tune of 241.3 billion rupees in the first quarter of the current year. This clearly is not repayment to official sources for which deferment was sought and granted but on unofficial sources notably commercial borrowing, which is at a high rate of return and for a short amortization period, bilateral loans with reports indicating that the government may seek an additional loan from China as other friendly countries are reportedly recalling their loans, and through issuance of Sukuk/Eurobonds, debt equity, which would be at a high rate of return unless the government succeeds in reaching a staff level agreement with the Fund.
This newspaper has consistently pointed out that the frequent claims of reducing current expenditure (notwithstanding the decline in the budgeted outlay for the prime minister, cabinet members, presidency as well as freeze in salaries of civilian and defence personnel) is not reflected in the budgeted current expenditure other than around 1.3 trillion rupee decline associated with no foreign official loan repayment in the current year. And it is this aspect of the budget that no doubt is a concern for the IMF and should be for the Khan administration.
Copyright Business Recorder, 2020