Budget deficit for 2014-15

Questions are being raised in Pakistan about the true health of the economy in general and fiscal health in particular in print and electronic media. Independent economists with strong credentials, business/industry leaders and informed public at large believe that the government is manipulating statistics to paint a rosy picture of the economy and in so doing, it is giving a false sense of prosperity.
The IMF on the other hand has its own objectives. They want to show to their management that their "well designed program" is making successes in Pakistan and as such has kept their eyes and ears closed on accounting tricks, obviously for political reasons.
Pakistan was targeted to reduce fiscal deficit from "5.5 percent of GDP" in 2013-14 to 5.0 percent in 2014-15 under the IMF program. Despite one of the worst performance on revenue front in 2014-15, the government would show the achievement of the budget deficit target using all kinds of accounting tricks as before. IMF on the other hand, will ignore these accounting gimmickries and will give a certificate of "good economic health".
What is the true budget deficit for 2014-15 is the subject matter of this article. I would like to remind the readers that a similar exercise was carried out by myself for 2013-14 and published in this newspaper (October 13, 2014). According to my calculation, fiscal deficit was 8.4 percent of GDP as against 5.5 percent declared by the government and accepted by the IMF. Interestingly, the State Bank of Pakistan (SBP) in its Annual Report for 2013-14 vindicated my position.
There are two ways to calculate budget deficit. One, as revenue-expenditure gap and second from financing side. That is, whatever revenue-expenditure gap we have, it has to be financed from various sources. Sum of these financing should be equal to the size of the budget deficit.
Budget deficit can be financed from domestic and external sources. Within domestic sources, the government can borrow from banks (commercial banks and the SBP), non-bank (national savings schemes) and can use privatisation proceeds, if available. From external sources, it can borrow by floating bonds in international capital market, IFIs (the World Bank, ADB etc.) and bilaterally. In this article, I estimated the budget deficit from financing side. All the financing numbers are posted at the SBP's website.
The government has borrowed Rs 1526.3 billion from commercial banks in 2014-15 to finance budget deficit. The outstanding stocks of government securities (PIBs, treasury bills and domestic sukuk) held by banks and non-banks was Rs 6955.1 billion as of June 2015 as compared to Rs 5428.8 billion on June 2014. Thus the net addition of Rs 1526.3 billion was used to finance budget deficit. The government, instead of borrowing from the SBP has in fact retired Rs 474 billion, hence this much amount is subtracted from domestic financing sources.
From non-bank sources, the national savings schemes mobilised Rs 309 billion during July-May 2014-15, that is in eleven months. I used the last year's June number (Rs 33 billion) to represent for June 2015 to complete the year. Hence, the total mobilisation for 2014-15 amounted to Rs 342 billion. The government uses net mobilisation of national savings schemes to finance fiscal deficit.
The total borrowing from domestic sources amounted to Rs 1394.3 billion (Rs 1526.3 + 342 - 474 billion). From external sources, the government borrowed $1.0 billion or Rs 101.3 billion by floating sukuk bond in international market (see Budget in Brief 2015-16, Page 14). The net external financing, as reported in the balance of payment table in SBP website, amounted to $1298 million or Rs 132.4 billion. Hence, the total borrowing from external sources to finance budget deficit amounted to Rs 233.7 billion.
The total borrowing from both domestic and external sources to finance budget deficit for 2014-15 stood at Rs 1628 billion or 6.0 percent of GDP. Now the real accounting trick sets in. Instead of using Habib Bank Ltd. (HBL) privatisation proceeds of Rs 103 billion as financing item, the government used this proceed as non-tax revenue to show a lower deficit.
Why the HBL privatisation proceeds went to the SBP as its profit and returned to the Ministry of Finance as non-tax revenue? This question was asked by a journalist of an English daily during the press briefing of the Governor, SBP. This was reported by that newspaper on July 26, 2015. Exactly after one week (August 2), the SBP published its weak, frivolous and unprofessional defence in that newspaper by simply stating that it has "followed the same accounting policy and practice for the sale proceeds of Allied Bank in 2014-15 and UBL in 2013-14", that is, during the years when 'creative accounting' drew the attention of independent economists.
According to the IMF's own publication ("Fiscal and Macroeconomic Impact of Privatisation", Occasional Paper No. 194, 2000, Page 1), it states that "privatisation is an exchange of assets; the receipts are lumpy, one-off and uncertain. Thus, privatisation proceeds should be treated as a financing item in the fiscal accounts". Yet, the government has used this as non-tax revenue, violating all economic principles. The IMF for political reason, will accept privatisation proceeds as non-tax revenue, no matter they have to eat their own words.
Let me raise the following questions for the IMF. Firstly, can a Central Bank, being a regulator of the commercial bank own a bank? Isn't it a pure conflict of interest? Secondly, who used to nominate Directors in HBL, UBL, ABL etc.? It is the Ministry of Finance, always nominated Directors in these banks to represent government shares, not the SBP shares. Hence, these banks were owned by the government and not by the SBP. Therefore, the sale proceeds must go to government to finance budget deficit.
Following the standard practice and as documented in the IMF publication stated above, I have used privatisation proceeds as financing item. Therefore, by adding Rs 103 billion privatisation proceeds, the total financing for budget deficit stood at Rs 1731 billion or 6.3 percent of GDP.
Now yet another blatant use of accounting trick. The government is not settling the circular debt in energy sector amounting to Rs 615 billion according to the IMF, which it has consistently done every year since 2010-11 (see SBP Annual Report). If we take Rs 615 billion (or 2.3% of GDP) circular debt, the budget deficit for the fiscal year 2014-15 stood at Rs 2346 billion or 8.6 percent of GDP. This is apple to apple comparison of deficit number of 2012-13 (benchmark used in IMF Programme).
Let me leave another set of questions for the IMF. Can we say that Pakistan's fiscal situation has improved since 2012-13 under the IMF program? Can we say that Pakistan has reduced its fiscal deficit from 8.0 percent of GDP (prior to the programme) to 5 percent in 2014-15? Can we say that the definitions of revenue, expenditure and fiscal deficit are same under the IMF program as it were before the program? The nation expects answers for these questions from the government and the IMF.
(The writer is Principal and Dean at NUST School of Social Sciences & Humanities, Islamabad)