EDITORIAL: State Bank of Pakistan (SBP) reported a statistic that should send alarm bells ringing throughout the country but particularly for all stakeholders, political and institutional, that the federal and provincial governments borrowed 2.876 trillion rupees from 1 July 2023 to 16 December 2023 against 961 billion rupees borrowed in the comparable period last fiscal year – a 200 percent rise so far.
The major portion of this borrowing was by the federal government to the tune of 1.855 trillion rupees, representing an increase of 172 percent for the period under review. Two observations are in order.
First the Ishaq Dar-led Finance Ministry, from 27 September 2022 till 8 August 2023, relied heavily on domestic borrowing to meet not only the budgeted current expenditure agreed by his predecessor Miftah Ismail with the International Monetary Fund (IMF) under the staff level agreement (SLA) reached on the seventh/eighth review of the Extended Fund Facility programme but he then proceeded to raise this expenditure by 26 percent as indicated in the revised estimates of the year as foreign pledged inflows dried up with the Fund refusing to agree to the ninth review due to Dar’s extensive violations of the SLA.
Subsequent to the SLA on the Stand-By Arrangement dated 29 June 2023, there were few violations other than the release of more than 61.3 billion rupees in July 2023 for parliamentarians’ schemes for political considerations. This leads to the second observation; notably that the bulk of the staggering amount of domestic borrowings were made by the caretaker cabinet installed on 20 August 2023.
It is important to note that the high rate of borrowing reflects flagrant violation of basic economic principles that must raise a red flag amongst the stakeholders on three counts: (i) mark-up on domestic debt was already budgeted at a high of 48 percent (in total terms at 6,430,305 million rupees against total current expenditure of 13,344,395 million rupees – an amount that has been borrowed from domestic banks at a high rate of interest, given that the prevalent policy rate is 22 percent; (ii) injected the money back into the economy for current expenditure as opposed to development expenditure, which is not backed by a rise in output - a highly inflationary policy, which has contributed to the 29.2 percent consumer price index for November and over 42 percent in the sensitive price index for the week ending 21 December 2023.
This is clearly evident, given the massive cut in the budgeted development outlay in an attempt to contain the deficit – a policy that was followed by former finance ministers as well, that impacted on the economy by reducing the growth rate; and (iii) the rise in government borrowing has crowded out private sector borrowing, an engine of growth, that accounts for the large-scale manufacturing sector going again into the negative growth realm.
The reason for heavier than budgeted reliance on domestic borrowing is without doubt due to the rating agencies maintaining Pakistan’s downgraded rating in spite of the SLA reached on the first review of the SBA – a rating that has stayed the government’s hand from borrowing the budgeted 6.1 billion dollars from commercial banks abroad and issuing Sukuk/Eurobonds as the rate is simply too high.
A far better option would have been to reduce current expenditure by requiring a sacrifice from the influential people both in terms of revenue sources and expenditure outlay; however, no government civilian, military and caretaker, has ever opted for this approach.
It is about time we acknowledged the reality that in the lending community (bilaterals, multilaterals, commercial banks) debt equity is no longer operating on the same principles as in the pre-2018 period.
The country must deliver on its pledged reforms, specially structural reforms (and the most outstanding ones pertain to the power and tax sectors as well as sustained poor management of state owned entities), if it is to receive any assistance from anywhere in the world at affordable rates – and that includes friendly countries.
And more concerning is the fast-eroding capacity of an average Pakistani income earner, leave alone the 40 percent of Pakistanis now living below the poverty threshold, to meet their kitchen budgets, a factor that can lead to a serious socio-economic fallout. The luxury of deferring reforms is now past and one can only hope that all stakeholders understand this and take appropriate mitigating measures immediately.
Copyright Business Recorder, 2023