Fiscal Policy Statement

The Debt Policy Co-ordination Office, Ministry of Finance, submitted the Fiscal Policy Statement 2016-17 in the National Assembly, as required, on 30th January though it has not yet been placed on the agenda. The statement has two components: public debt and budgetary spending. External public debt, the statement reveals, has risen by one billion dollars during July-September 2016: outflows including interest as well as repayments for the period amounted to 1.08 billion dollars while inflows accounted for 1.83 billion dollars or there was a net inflow of 0.22 billion dollars. What is extremely worrying about this data is that the bulk of the borrowing (inflows) were from commercial banks - to the tune of 900 million dollars - which carry a high rate of return and a very short amortisation period. This reliance continued into the second quarter of the current year resulting in a net outflow during the first six months of 2016-17. Any increase in reliance on borrowing from the external commercial banking sector would simply increase outflows with a rising negative impact on foreign exchange reserves gathering further momentum in months to come. This trend, if allowed to continue, would increase the need for borrowing to meet the country's debt obligations whereas previously the government was procuring foreign loans to shore up foreign exchange reserves.
Reliance on domestic borrowing rose dramatically during the Sharif administration's tenure and it is significant to note that in March 2013, the last month in the tenure of the PPP-led coalition government, total domestic debt was 8.8 trillion rupees while by November 2016 the State Bank website noted total domestic debt of 14.64 trillion rupees - an unprecedented rise of 66 percent. In addition, multilateral sources, including the International Monetary Fund and other development partners, disbursed 507 million dollars during the first quarter - a period when the country was still on the IMF programme and was eligible for budgetary support from other multilaterals/bilaterals as strict monitoring of the agreed reform agenda by the Fund provides a comfort level to other lenders. Thus in the second quarter of the current year multilateral/bilateral support was largely project specific rather than for budgetary support. And in this context, the fiscal statement's revelation that actual expenditure was 3 percent higher than budgeted while tax revenue was 8 percent lower than in the comparable period last year must be a source of very serious concern to the country's economic managers.
The rise in spending is attributed to a 13.3 percent rise in provincial spending for development as well as current expenditure - Punjab's development projects were mainly focused on transport and construction as well as higher spending on storage and interest costs associated with wheat procurement while Sindh's higher expenditure was attributed to local bodies' elections. The statement notes that net lending and development expenditure rose by 15 percent - to 4.4 percent of GDP in the first quarter, up from 4.2 percent a year ago; and growth was mainly led by the 20 percent increase in provincial development expenditure. Revenue declined from 937 billion rupees last year to 862 billion rupees in the comparable period this year. Non-tax revenue declined sharply due to the absence of Coalition Support Fund and lower State Bank of Pakistan profits. The statement as in the past notes highly salutary but unrealistic targets with respect to its guiding principles: "lengthening of maturity of profile of domestic debt and mobilisation of sufficient external inflow in the medium term while making appropriate trade-offs between cost and risks." It is relevant to note that Ishaq Dar a year ago had stated that his objective was to borrow from external sources, with low interest rates, and retire domestic debt procured at high rates of interest. However, while he kept the rupee overvalued to understate the country's annual debt repayments yet hindsight must surely lead him to conclude that the next time he makes such an economically disastrous policy he must not lose sight of the fact that an eroding rupee value that on average declines by 4 to 5 percent per annum.
With respect to the fiscal policy statement, the focus is on "multifaceted reforms for revival of Public Sector Entities is based on a number of pillars which include divestment through strategic partnership and public offerings, strengthening enforcement of corporate governance rules, implementation of restructuring plans and regulatory reforms." Sadly, Pakistan Steel Mills and PIA remain in greater financial hardship than during the tenure of the PPP-led coalition government with little visible improvement in governance and the government's notification that brought 5 regulatory bodies that were performing their due role, ie, of checks and balances on the relevant ministries, under their (ministries) control negates the independence of the regulators in their decision-making to the detriment of public.