EDITORIAL: The fiscal summary is a mixed bag in 1HFY24 (first six months of fiscal year 2023-24) as the government has posted a healthy primary surplus of Rs1.8 trillion (1.7% of GDP), which is surpassing the IMF’s (International Monetary Fund’s) target.

The overall fiscal deficit stood at Rs2.4 trillion (2.3% of GDP), exhibiting a growth of 43 percent from the same period of last year. The deficit is higher as the government debt servicing is growing at an alarming rate while decent primary surplus is due to SBP (State Bank of Pakistan) profits in the 2Q (second quarter).

The growth in government debt servicing is worrisome as it stood at Rs4.2 trillion in 1HFY24 – up by 64 percent YoY (year-on-year). The servicing really ballooned in the 2QFY24s, which stood at Rs2.8 trillion — more than double — both on a quarterly and yearly basis.

The impact of monetary tightening is appearing with a lag (policy rate reached 22 percent in June 2023, while the market yields peaked in Sep 23). With most of the government debt in floating PIBs (Pakistan Investment Bonds), the impact of rate hikes is reflecting with a lag.

There is also no stopping government borrowing, as provinces kept on spending like there is no tomorrow while any meaningful resolve to curtail spending is missing at the federal level, as they are just curbing the flow of development spending.

The statutory limit on government borrowing has been breached quite some time ago and the breach is being widened with impunity. At present, the debt stands at 14.5 trillion rupees above the statutory ceiling that casts a very poor light on the government’s debt management strategy and efforts.

All the efforts of the caretaker government are apparently geared towards passing on the impact of the leakages onto the consumers – especially in energy – be it gas, electricity, or petroleum products. These have resulted in limiting the growth of circular debt, jacking up the tax and non-tax revenues being charged in the form of taxes and levy on higher tariff.

The growth in tax revenues -– mainly direct taxes (41% YoY) — is due to higher interest being charged on debt, and a significant chunk of it coming back to the government. More than doubling of non-tax revenues is owing to all-time high SBP profits -– under the new Act of SBP, full-year profits are being shared one time with the government after the audit of SBP accounts. And last year profits were high due to record SBP indirect borrowing to the government (through open market injections). Thus, Rs972 billion SBP profits partially offset the higher debt servicing.

The second half is going to be challenging. There are no more SBP profits to come and the recent reduction in treasury market yields impact to be visible with a lag. And the continuous OMO (open market operations) injections (note printing) come to haunt the fiscal house.

Here the performance of the caretaker government is challenged. Had they taken (or at least initiated) the tough structural reforms by lowering the expense on the devolved subjects, by stopping the bleeding SOEs (State-Owned Enterprises) and by lowering the size of the government, the benefit could have been accrued.

Now the new government will be formed, and there might not be any long honeymoon period, as the next IMF programme is to be negotiated where raising the tax to GDP and serious efforts to curb the expenditure will be demanded. Without any fiscal consolidation, the debt restructuring is only delayed.

Copyright Business Recorder, 2024


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