EDITORIAL: The federal finance minister, Dr Hafeez Sheikh, made disturbing revelations to the cabinet while seeking its approval to present the Fiscal Policy and Debt Policy Statement to parliament as required under the Fiscal Responsibility and Debt Limitation Act 2015. The government spent 3 trillion rupees to correct the Pak rupee-US dollar exchange rate, Dr Sheikh noted. This claim raises questions on the need for such massive correction given that after the ignominious departure of Ishaq Dar from the country in August 2017, his successors - Miftah Ismail of the PML-N and Asad Umar of the PTI – appropriately abandoned Dar’s flawed policy to keep the rupee overvalued to understate the country’s debt repayments; and began correcting the rupee value through depreciation. From an overvalued rupee of around 105.12 rupees to one dollar in August 2017 (a rate that was reportedly between 5 to 20 percent overvalued as per a quarterly International Monetary Fund review), the rupee was valued at 117 to 118 to a dollar by April 2018 (at the end of the PML-N tenure), and around 150 rupees to the US greenback by the time Asad Umer was dislodged as the Minister of Finance.
As per the State Bank of Pakistan (SBP), the real effective exchange rate (REER) was 121 in June 2017, down to 107.4 in June 2018 and by the time Asad Umar left the Ministry of Finance, the REER was 98.5. In October 2020 the REER (provisional) was given at 97.1. And while the SBP insists that one cannot measure the degree of over or under-valuation by using 100 as the key determinant in the REER (a view not shared by previous governors of the SBP) yet the SBP has to date not come up with any estimate or projection of the real rupee value other than to insist that it is a long-term concept.
An undervalued currency, as per economic theory, raises exports and reduces imports and one reason for the rupee depreciation may have been to contain the historically high current account deficit inherited by the PTI government. However, a linear linkage between a cheap rupee and exports has not been established in Pakistan and one would have hoped for some research on this before us 3 trillion rupees was used to ‘correct’ the rupee-dollar parity.
Dr Hafeez Sheikh further noted that total debt today is 36.5 trillion rupees against 25 trillion rupees that the PTI government inherited with 11.5 trillion rupees borrowed during the past two years – 600 billion rupees for debt servicing, 3 trillion rupees for the rupee-dollar parity correction and 1.5 trillion rupees for subsidies to meet the tax shortfall due to Covid-19 outbreak. Four observations on this data are critical: First, the government broke all previous records by borrowing heavily from the domestic market - from 16.4 trillion rupees that it inherited to 23 trillion rupees – a rise of 40 percent, a highly inflationary approach to economy.
Second, as per the State Bank of Pakistan, the government borrowed 17 billion dollars in two years; however, the Ministry of Finance in its clarification uploaded on its website argues that: (a) foreign debt of 7.8 billion dollars (44 percent rise) was to finance its fiscal deficit (so much for claims that the government reduced its expenditures particularly outlay on the Presidency, the Prime Minister’s office and of various ministries which we have consistently maintained constitutes a very small percentage of total outlay); in addition, the argument that borrowing was to fund Covid-19 related expenses requires clarification given that 695 billion rupees should have been taken out of the 1.2 trillion rupee package announced in April 2020 as 280 billion rupees wheat procurement is a usual annual activity that is later recovered by the government, 100 billion rupee refund to exporters was already budgeted, as was the advance payment under Benazir Income Support/Ehsaas programme of around 190 billion rupees was budgeted under this head for the year while the package noted 144 billion rupees; (b) 4.8 billion dollars (27 percent rise) on account of SBP’s foreign exchange liabilities including swap arrangements with countries and commercial banks to sustain reserves required for three months of imports; (c) 2.2 billion dollars (13 percent rise) on account of public sector entities reflective of sustained government failure to improve performance; and (d) 2.099 billion dollars private sector borrowing.
And finally, responsibility for the revenue shortfall rests with the finance minister for agreeing to an arguably over-ambitious target with the IMF (the Federal Board of Revenue is under his administrative control) in spite of several warnings by his ministry and FBR officials as well as the independent economists and media that the 5.5 trillion rupee target was unrealistic as is the 4.9 trillion rupee target agreed for this year. In our view, the cabinet members need to question the Ministry of Finance’s claims in order to hold those who are responsible and accountable. Their attention must not be diverted by a focus on the primary surplus, which excludes borrowing costs, especially as the rising budget deific (at present 2.5 percent of GDP – higher than the comparable period of the year before) is being met by heavy borrowing from the domestic and foreign markets.
Copyright Business Recorder, 2021