The International Monetary Fund (IMF), in a recent publication titled IMF fiscal monitor, projected a gross debt of 65 percent in the current year (inexplicable as the State Bank of Pakistan website gives the figure of 65.9 percent in the first quarter and 65.7 percent in the second) and 63.7 percent next fiscal year. While projection for the current year is no doubt premised on the Fund’s considerable leverage under the 6.64 billion dollar Extended Fund Facility (EFF) to compel the Pakistan authorities to meet the agreed macroeconomic targets yet the Fund has no means to enforce gross debt- to-GDP targets for next fiscal year. Be that as it may, the budget for next fiscal year is going to be announced in June while the EFF is scheduled for completion by September 2016 thus the Fund’s projections for next year maybe based on the budget documents that are no doubt being shared with the Fund staff at present.
However, the Fund must surely be aware of the fact that budgets during the current Sharif administration, like during previous tenures, show grossly overoptimistic tax revenue targets, which the government has been compelled to meet by Fund staff through mini-budgets – a leverage that the Fund will lose by September this year. In addition, the development spending that fuels growth and employment levels has been curtailed year after year under the EFF given the focus on deficit reduction as opposed to growth. The outlay on social infrastructure development by the provinces subsequent to the passage of the 18th Amendment which devolved these sectors has also been curtailed severely under the EFF due to pressure by the Federal Finance Ministry to the provinces to generate ever-rising surpluses. For the current year, Dar provisioned in the budget a provincial surplus of 297 billion rupees to enable the federal government to meet its deficit targets – a target that is being met through slashing social infrastructure outlay by the provinces. Current expenditure, however, has invariably been higher than budgeted – a rise not attributable to defence as much as to subsidies. Low tax-to-GDP ratio and higher than budgeted current expenditure account for the government’s decision to borrow heavily from both available domestic and external sources/markets.
The debt-to-GDP ratio was largely met in 2010 at 60.6 percent, registered 58.9 percent in 2011, and 63.3 percent in 2012 largely due to a rise in domestic debt. However post-Dar, the figures have been much worse as indicated in the Fund report due to heavy reliance on domestic and foreign borrowing thereby not meeting the requirements of the Debt Limitation and Fiscal Responsibility Act notified in June 2005.
This Act stipulated enviable policy objectives including: (i) reducing the revenue deficit to nil not later than 30th June 2008 and thereafter maintaining a revenue surplus. Unfortunately, the Musharraf-led government first violated this Act that it passed during its tenure by massively subsidising price of petroleum and products after they touched a high of over 140 dollar per barrel in 2007 with the objective of securing an electoral win in which it singularly failed; and (ii) ensuring that within a period of 10 financial years, beginning from 1st July 2003 and ending on 30th June 2013, the total public debt at the end of the 10th financial year does not exceed 60 percent of the estimated GDP for that year and thereafter maintaining the total public debt below 60 percent of GDP for any given year. In 2012-13 (comprising nine months of the PPP-led coalition government, a bit over two months of caretakers and the last 20 to 25 days of the Sharif administration) debt-to-GDP ratio was estimated at 63.3 percent inclusive of the debt acquired for retiring around 400 billion rupee energy sector circular debt by the Dar-led Finance Ministry.
What has been ignored and is an important component of the Act is the stipulation that principles of sound fiscal and debt management may include “not issuing new guarantees, including those for rupee lending bonds, rates of return, output purchase agreements and all other claims and commitments… for any amount exceeding 2 percent of GDP in any financial year,” and renewal of existing guarantees would be considered as issuing a new guarantee; however the government of the day was allowed an out from these targets on grounds of unforeseen demands on finances due to national security or natural calamity but must first give reasons for departure from these targets, identify measures to deal with them, and the period of time prior to returning to the principles in the Act.
Failure to meet the targets of the Act requires the government to submit a statement to the National Assembly, which it did in January this year conceding that it breached targets of reducing revenue deficit to nil and scaling down debt-to -GDP ratio below 60 percent. The statement acknowledged that public debt was recorded at 18 trillion rupees by end September 2015 (the SBP gives the total of 20 trillion by December last year which was not mentioned in the government’s report) registering an increase of 762 billion rupees during first quarter of 2015-6 though the total budgeted fiscal deficit for the year is 1.32 trillion rupees.
Out of this total increase, increase in domestic debt contributed 520 billion rupees while government borrowing for fiscal deficit was 273 billion rupees during first quarter of 2015-16. If one multiplies this by the remaining three quarters of the fiscal year the conclusion by independent economists is that debt is unsustainable given our low growth which implies low tax collections, mini-budgets that target existing taxpayers with a dampening impact on consumption and therefore domestic output – factors that would fuel government borrowing.
Source: Business Recorder