State of public finances – Newspaper

PAKISTAN is in the vice of a "trap" of debt. Nothing reveals this more clearly than the recently published figures on the fiscal deficit and debt and total liabilities for 2018-19. The budget deficit has been recorded at 8.9 percent of GDP, while debt and total liabilities have increased by Rs. 10.3 trillion, or 35 percent, in the last fiscal year alone, to cross Rs 40tr . At this level, the country's total debt and liabilities are 104 percent of GDP, with a gross public debt of 85 percent of GDP, well above the threshold stipulated in the country's fiscal responsibility and debt limitation law of 2005.

Headline numbers have been widely used as an instrument to fight against the government, and the media and commentators generally attribute the fiscal "outbreak" entirely to the PTI government, accusing it of a serious fiscal indiscipline in the past year. Surprisingly, even more serious commentators have conducted a cursory analysis and declared that the serious fiscal situation is a "disaster" entirely created by the government. However, a sober and objective examination reveals the role of four main factors behind the deterioration of public finances in the last year.

Read: a bad first year

Consider the 35{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} increase in the country's total debt and liabilities during 2018-19. This figure is recorded in rupees, but includes a considerable part of the external debt and foreign exchange liabilities denominated mainly in US dollars that are converted at the year-end exchange rate. The Rs / $ rate used for this conversion of the outstanding foreign debt balance in rupees was 121 / $ on June 30, 2018, but had fallen to Rs 163 / $ on June 30, 2019, adding Rs4.3tr only on account of the depreciation of the exchange rate. This represents 41{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of the total increase recorded in the country's debt and liabilities for 2018-19.

According to my estimate, another approximately 500 billion rupees are explained by the higher interest payments incurred by the government due to the 6.75 percentage point increase required by the IMF in the policy rate. An additional Rs 667 billion is due to the increase of more than $ 4 billion in the service of external debt during 2018-19 related to previous loans of the PML-N government that expired during the year. The government had to resort to additional loans to cover these expenses, thus increasing the public debt.

The unfortunate state of public finances presents a serious challenge.

Finally, the government assumed almost Rs1.2tr of loans & # 39; preventive & # 39; from the State Bank of Pakistan before the end of the year, and before the start of the IMF program, and placed it in its cash reserves to withdraw some domestic debt repayments due this fiscal year.

Combined, these four factors only represent 70{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of the increase in total debt and liabilities recorded during 2018-19.

A similar story, largely unreported, refers to the budget deficit, which expanded from 6.6{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} in 2017-18 to 8.9{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of GDP in 2018-19. While the fiscal revenue deficit has generally been held responsible in the media for the expanding fiscal deficit, it has played a minor role compared to two other major factors. Interest payments on public debt were higher at Rs 591,000 million in 2018-19 compared to 2017-18. Non-tax revenues, of which SBP earnings transferred to the budget are a substantial component, recorded a fall of Rs334bn. These two factors together explain 80{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of the fiscal deficit increase, but have been largely ignored by the media and the commentator. A lower provincial surplus reflected in the consolidated budget explains much of the rest of the difference.

Since interest payments are now the largest component of budgetary expenditure, which represent 30{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of total current expenditure, it is difficult to see where spending cuts can be applied in the immediate term. The two ways to see the elephant in the room are the following: a) while the fiscal deficit & # 39; main & # 39; It is 8.9pc of GDP, adjusted for interest payments (which must be made and are not discretionary), the budget deficit is 3.5pc. The latter is known as the primary deficit. b) Interest payments now represent 103 percent of net federal revenues, after constitutional transfers by mandate to the provinces.

Given this fiscal straitjacket, the primary deficit, instead of the main budget deficit, together with fiscal revenues, is the main focus of the current IMF program.

While the focus on tax revenues of a larger segment of the population eligible for taxes has strong foundations and reasons, despite an out of place challenge of libertarian neighborhoods (which will be addressed in a later article), the ideological struggle and without IMF nuances against all. The forms of spending without discriminating between those that feed aggregate demand and those that do not, need greater scrutiny. Reducing energy subsidies for vulnerable segments of the population, or subsidies for the export sector, for example, may be quick "fixes" for an inflated budget, but it does not seem to be adequate.

In any case, given the budget restrictions imposed by low-income collection, Pakistan has practiced "austerity" for too long. The development budget has fallen from more than 7{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of GDP in the 1980s to a mere 2.6{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} today. Interest-free spending is 16.2{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of GDP, while it should be closer to 20{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} (even after taking into account greater efficiency in spending) to accommodate higher spending on education, health, infrastructure, maintenance, provision of public services and other critical expenses such as building resilience to climate change or improving the capacity of RBAs.

The savings on the expenditure side must come from structural measures, such as reducing the losses of public sector companies, reducing leaks in public sector development and procurement projects, improving the efficiency of the electricity sector and making savings through more effective public debt management etc. The materialization of these will take some years of serious reform efforts.

Until then, painful fiscal pressure is likely to continue with its effects in general.

The writer is a former member of the economic advisory council of the prime minister and runs a macroeconomic consultancy based in Islamabad.

Posted on Dawn, September 13, 2019



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