EDITORIAL: According to the auction calendar issued by the State Bank of Pakistan, the federal government intends to borrow 11.09 trillion rupees in three months (August to October 2023) from the domestic banking sector with 8.25 trillion rupees to be generated through six auctions for market treasury bills, against the maturing amount of 8.9 trillion rupees.
Two trillion rupees is planned to be generated from sale of long term security and 510 billion rupees from sale of variable ijara/sukuk rental rate and 330 billion rupees from fixed ijara/sukuk rental rate.
This intent and the likelihood of its success was commented upon by the International Monetary Fund (IMF) in its Stand-By Arrangement (SBA) documents uploaded on the website on 18 July this year: “More generally, revenue efforts to broaden the tax base fell short of expectations during the EFF period, and the tax-to-GDP ratio has declined.
At the same time, as financing conditions tightened and the cost of domestic and external borrowing increased, the interest bill reached 6.6 percent of GDP, and absorbed 2/3 of tax revenue. In addition, market issuance has become increasingly challenging with several unsubscribed Treasury auctions during Fiscal Year 2023 and the issuance of domestic debt tilted towards floating rate instruments.”
The SBA set a prior condition of lowering the 9 June budget outlay by 300 billion rupees - 215 billion rupees through generating additional taxes and 85 billion rupees from reducing current expenditure - announced on 27 June by the then Finance Minister in his budget debate winding-up speech.
However, while the additional 215 billion rupees in taxes has been incorporated in the revised budget documents uploaded on the Finance Division website the reduction in current expenditure has not been incorporated.
Be that as it may, in the critical section titled ‘Memorandum of Economic And Financial Policies’ the government pledged to “continue our proactive debt management efforts to cover the large financing requirements which are putting pressure on our debt sustainability. Given the large share of floating-rate domestic debt and elevated global interest rates, our debt servicing costs are projected to rise in the near term.
In view of this, there is an increasingly narrow path for fiscal and monetary discipline to ensure debt sustainability. Given the importance of maintaining an active market for domestic debt, we will continue to rely on the regular primary T-bill, PIB and Sukuk auctions as the main mechanism for raising new domestic financing; and are committed to refraining from any new financing through direct credit lines, loans, or private placements with domestic financial institutions, including but not limited to local branches of foreign banks.
In this regard, the temporary exemption from relevant procurement regulations, obtained from PPRA [Public Procurement Regulatory Authority] on February 22, 2023, will be revoked by cabinet by July 30, 2023.” There have been no reports of the revocation to date and with no cabinet meeting held in August there are concerns that this pledge too may remain unmet.
It is also relevant to note that the 9 June budget envisaged 3124 billion rupees from bank borrowing while the revised budget projects 2860 billion rupees; however, the realization of the amount will depend on a host of factors, including meeting the pledges made by the government with the IMF under the SBA.
To deal with the recurring economic crises that have beset this hapless country, the Fund and the government have invariably focused on raising taxes.
The SBA is no different in this regard and given the heavy reliance on indirect taxes to generate revenue whose incidence on the poor is greater than on the rich (accounting for up to 80 percent of the total taxes budgeted to be collected in the current year), the capacity of the public to withstand any further increase is rapidly narrowing with each passing week – a capacity further weakened by close to 30 percent Consumer Price Index estimated for July – a factor that holds the seed of socio-economic unrest.
Business Recorder has repeatedly highlighted the need to slash current expenditure which is tilted in favour of the elite with less than 3.5 percent of total current expenditure earmarked for the identified poor and vulnerable under the Benazir Income Support Programme.
For the country to gain some leverage with international donors, a leverage that has been systematically eroded by our administrations past and present, there is a need for elite sectors to voluntarily sacrifice their budgeted allocations, which may require far reaching politically challenging reforms.
Copyright Business Recorder, 2023