The government has yet to table the Fiscal Policy Statement January 2021, as required under Section 6 of the Federal Responsibility and Debt Limitation Act (FRDL) 2005, as lawmakers’ focus this week past remained on the controversial constitution amendment bill seeking an open senate election vote. The result: no one took the time or made the effort to challenge the government’s economic team’s narrative notably that pre-Covid-19 everything was hunky-dory while slippages after the onslaught of the pandemic were beyond the control of the federal government.
Compliance with the FRDL as per the Statement comprised of: (i) interest payments of 2.62 trillion rupees on debts mostly obtained by the previous regime; this repeated narrative has found considerable traction with the PTI leadership, particularly the Prime Minister, however the Ministry of Finance must surely be aware of the fact that administrations globally have to pay debts incurred by their predecessors, as would the next administration on debts incurred by the Khan administration; and (ii) primary deficit was 982 billion rupees with pre-Covid reflecting a surplus of 194 billion rupees and post-Covid “the earlier gains created enough fiscal space to deal with Covid19 shock and kept the full year federal primary deficit lower than last fiscal year.” Two observations are in order. First, the primary deficit does not take account of the debt repayments of past administrations as well as debt incurred by the incumbent government and therefore its inclusion in the debt statement is irrelevant. And, secondly, the earlier gains referred to in the Statement do not reflect the over 2 billion dollar loan extended to the government for Covid19 relief by multilaterals (including the 1.4 billion dollars by IMF) or the 1.7 to 2 billion dollars deferred payment on interest and payments requested by the Economic Affairs Division (as per its press release) under the Debt Service Suspension Initiative (DSSI) by the G-20 to help poor countries deal with Covid-19. In other words, the fiscal space of around 4 billion dollars was created through deferment and additional loans acquired to deal with Covid-19 or around 630 billion rupees if the exchange rate is taken at 158 rupees to the dollar. The 1.2 trillion rupee Covid relief package announced by the government was in actuality no more than 680 billion rupees as many of its components were already budgeted.
The Statement does not dwell on the massive rise in domestic borrowing by the present government which reached a historic high of over 23 trillion rupees against the 16.5 trillion rupees that PTI inherited or a rise of 7.5 trillion rupees (40 percent) in less than two and a half years – an amount which is 0.5 trillion rupees higher than what was borrowed during the five-year PML-N tenure which inherited total domestic borrowing of 9.5 trillion rupees in 2013. The Khan administration has extended the amortization period of loans however the extension implies higher interest though the repayment period is extended. In addition, reliance on issuing Pakistan Investment Bonds has risen quite dramatically – which is linked to the discount rate and raises questions of whether the current 7 percent rate with headline inflation at 5.7 percent (government figures) and core inflation of 5.4 percent, is not a contractionary policy as opposed to the expansionary policy required to tackle the pandemic.
Foreign debt of 38.5 billion dollars was envisaged by Pakistan’s economic team leaders as noted in the signed Letter of Intent submitted to the IMF board for approval of the 6 billion dollars programme in July 2019 for thirty nine months; and since then (as noted above) 2 billion dollars additional have been credited to the account under multilateral loans. This amount is historically the highest ever incurred in five years of any past administration.
Total public debt as per the Statement was 36,399 billion rupees in June 2020, 87.2 percent of GDP, which is above the 60 percent rate envisaged in the FRDL while it notes that the currency devaluation impact was much lower in 2019-20 as Pakistani rupee depreciated only by 3 percent against the US dollar; sadly no figure was cited under this head though on 21 October 2021 the Ministry of Finance provided clarification on data uploaded on the State Bank of Pakistan (SBP) website that showed a 17 billion dollar increase in debt and liabilities in just two years. And claimed that it borrowed 7.8 billion dollars - 44 percent of the increase - for financing the fiscal deficit during the first two years and that “these additional borrowings were from multilateral and bilateral development partners whereas portion of loans from commercial sources were repaid. Borrowings from multilateral and bilateral development partners were contracted on low cost and longer tenor, which contributed towards enhanced external public debt sustainability during the tenure of present government.” Though reliance on commercial borrowing (external sources) plummeted from 389 billion rupees (revised estimates of 2016-17 – the last full year of the PML-N government) to 6.8 billion rupees in the revised estimates of 2018-19 (Asad Umer was the finance minister till the third week of April 2019) yet this trend reversed after the appointment of the incumbent Finance Minister and commercial borrowing rose to a historic high of 623.6 billion rupees in the revised estimates of 2019-20 and, disturbingly, is budgeted at 647.2 billion rupees in the current year. Only part of this rise is accounted for by the depreciation as on April 2019 the exchange rate was 141 rupees to the dollar but the Ministry of Finance claimed in its clarification that it cost the government an additional 3 trillion rupees in foreign debt servicing while the Statement notes that the government paid 2.6 trillion rupees on debt mostly acquired by the previous government, as of course is the case globally – the word ‘mostly’ was again conveniently not quantified.
A similar trend is evident in programme loans/budget support from multilateral/bilateral sources – from 59.8 billion rupees in 2017-18 after the PML-N government reversed its earlier policy reforms under the IMF package and geared towards elections to a whopping 620.2 billion rupees in the revised estimates of 2019-20 (excluding IMF loan) and 503.5 billion rupees projected for the current year.
Dar is further correctly accused of relying heavily on SBP borrowing. In this context, Dr Hafeez Sheikh should surely be aware that while on an IMF programme Pakistani governments, civilian and military, have always desisted from borrowing from the SBP as that is a standard normal Fund condition; as has the incumbent government. Dar began borrowing from the SBP once the then IMF programme ended (September 2013-2016) and the PML-N began to gear itself for elections 2018. One question however is: given that debt servicing/payments are part of the deficit is this amount additional to the 7.8 billion dollars used for financing the budget deficit or whether the Ministry is counting this amount twice – in the deficit as well as separately.
To conclude, one would hope that not only the opposition but also the government’s law makers challenge the claims of the economic team and insist on the Ministry of Finance remaining focused on economic as opposed to political statements.
Copyright Business Recorder, 2021
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