An opinion piece in a section of print media on 27th January said the federal government’s borrowing from the State Bank of Pakistan (SBP) hit a high of Rs 6.6 trillion. It adds that the government has been borrowing at an average of Rs 15 billion a day for the past five months, that the budget deficit will hit a high mark and huge losses in PSEs. The opinion piece needs clarification on certain accounts to present the true point of view based on data and factual actions undertaken by the Government over the last several months.
Based on preliminary estimates, Government borrowing from SBP during July-December, 2018 was at Rs 1.2 trillion. Figures reported in the article at Rs 6.6 trillion is not correct and misleading. It is also important to note that due anticipation of increase in interest policy rate borrowing from scheduled banks was in negative at Rs (-) Rs 702 billion. A net bank borrowing during July- December, 2018 was Rs 496 billion. However, in the light of stability in the policy interest rate scheduled Banks have started a reasonable participation in government security auctions. It is projected that increased borrowing from banks will substitute in lowering borrowing from SBP in the coming months.
There is a need to understand the difference between increase in debt stock and actual borrowing of the government. The writer has been quoting a highly misleading number of Rs 15 billion a day for the past five months. He misquoted increase in debt stock as borrowing of the government i.e. devaluation impact due to depreciation of Pak Rupee against US Dollar has contributed significantly towards increase in debt stock of the government during first five months of current fiscal year. In fact, this devaluation impact was more than actual borrowing of the government.
The writer has appreciated the measures announced by the Government in the investment and promotion package of January 2019 in consultation with all the major stakeholders. This package has been announced to ease the cost of doing business in Pakistan, reverse the trends of de-industrialisation and support exports. All this is intended for job creation and enlarged social sector production for reducing poverty in the country.
The writer has correctly highlighted that the tax incentives announced in the Package would help to ‘direct additional credit towards three important sectors of the economy: small and medium-sized enterprises (SMEs), the agricultural sector, and the low-income housing sector’.
The writer is correct that the measures ‘will encourage savings, investments and, at the same time, compress the demand for imported luxury items’.
The reforms package announced by the Government is a continuation of the measures already announced earlier, like reduction in electricity and gas prices. The package is also focussed on reducing external imbalance, a legacy of ineffective policies of the last decade.
The Government has initiated measures on austerity, reducing tax evasion and monetary and exchange rate measures. The shortfall of Rs 170bn in FBR tax collection in first six months of FY19 is primarily due to reduction in GST on petroleum products to shield domestic consumers from rising international oil prices.
The measures to shield domestic consumers and especially the poorest and most vulnerable households have started to yield results and CPI inflation has declined for two consecutive months to 6.2% in December 2018, down from 6.8% in October 2018. More importantly, food price inflation has declined to just 0.9% in December 2018, compared to 3.3% in August, when the PTI government came to office. In the coming days further measures will be taken to provide relief to the poorest and most vulnerable households.
The most critical challenge facing the new government was to avert a balance of payment crisis. Due to tireless efforts of the Government, success has been achieved with significant investment and financial assistance from bilateral partners including Saudi Arabia, UAE and China. The Government has finalised a facility of trade finance for oil with the ITFC. Facility for oil on deferred payment has been finalised with Saudi Arabia and shall be operationalised soon. This will help improve Balance of Payments in the country.
These measures have started to restore confidence. Credit Default Swaps (CDS) has declined in January, making Pakistan US$ bonds the best performing bonds in the Emerging Asia markets. Similarly, the high participation in the PIB auction on 23rd January with a bid over Rs 344bn, shows improving sentiment locally, which will help reduce reliance on SBP borrowing This, will help government reduce reliance on SBP for deficit financing, a risk highlighted by the writer.
Prudent monetary policy stance by the State Bank of Pakistan is ensuring that inflation remains well anchored. The effect of such a policy is to protect the common man. At the same time, securing enough food supplies in the country has ensured that food inflation remains at the lowest. Expenditure management has been such where aggregate demand in the country has been managed to arrest the rising inflation and its effect on the current account.
It is a misplaced contention that the budget deficit, which is projected at 5.6%, will grow to 10%. The budgetary deficit is being very much managed by ensuring that the target of overall revenues including FBR and non-tax revenue for the year are met. The quasi-fiscal losses are being handled. The Government has already taken key measure to reduce the build-up of circular debt and the focus has not only been towards rationalization of prices but the plan of reducing losses, past recovery and a host of efficiency measures which are already in place and are showing results.
Growth maybe subdued in the immediate but will be broad based and financed through raising domestic savings and investment. Evidence for the first 6 month shows that the private sector in Pakistan both for working capital and for fixed investment has domestically borrowed around Rs 500 billion compared to Rs 230 billion in the first 6 months last year and the agriculture sector credit has shown a growth of 22% in the first 6 months. Therefore, the allegation that economic growth is dropping does not appear to be based on evidence that is presented in the first 6 months.
The statement that expenditure is out of control is also not correct. Expenditure growth is very much in control. Pakistanis are not being burdened by any amount that is being said by the author. Total provisional expenditure for first six months of current FY were marginally higher on account of interest payment, security and other spending. Interest payments during the year 2018-19 would be higher owing to increase in interest rates and exchange rate. In the budget total interest payments (on domestic & foreign debt) was estimated at Rs 1.6 trillion which is expected to increase from this amount but not as much as contended by the writer. For other expenditures the present government has abolish all discretionary allocations of the President and the Prime Minister. Further a 10% cut has been imposed on current expenditure. However, no cut has been imposed on security related expenditure.
The numbers quoted by the writer of losses in PSEs, energy and commodity sectors are highly exaggerated and misleading. It is reiterated that the Government has already taken targeted steps to appoint Heads in all key organizations on merit. In PSEs such as, PIA, banks and SECP, this has already been done to strengthen the overall governance and cut these losses. The energy sector has seen a reduction in the bleeding and a target has been set to bring the circular debt flow to almost close to zero, in the next 12 months. The writer’s contentions are all based on conjectures rather than any solid evidence and to the contrary, the remedial steps are very much underway to protect the assets of the people of Pakistan.