Reducing the debt from SBP

Advisor to the Prime Minister on Finance Shaukat Tarin has stated that the government is committed to retiring over 100 billion rupees debt to the State Bank of Pakistan (SBP) this month. This, he added, was part of a commitment made by the government to the International Monetary Fund (IMF) in its Letter of Intent (LoI) that was submitted to the Funds Board as a prerequisite for the approval of the 7.6 billion dollar loan.
The LoI explicitly states that the government is committed to limiting SBP financing of the budget to zero on a cumulative basis during October 1, 2008-June 30, 2009. During this period, the fiscal deficit will be fully financed by available external disbursements (which have already been committed), the acceleration of privatisation process, the issuance of treasury bills, and other domestic financing instruments, including Pakistan Investment Bonds, Ijara Sukuk, and National Savings Scheme (NSS) instruments."
This commitment contains four elements expected to impact on the economy. First and foremost limiting borrowing from the SBP, or reducing reliance on deficit financing, is an economic policy tool that lowers inflationary pressures.
Second, the government did not expect to finance the budget deficit of 4.2 percent, the original commitment in the LoI though this has been revised to 4.7 percent after the recent negotiations with the IMF team in Dubai, from either reducing expenditure or increasing tax collections or through self-sustaining policy actions but through what it termed as available external disbursements. These constitute funding from multilaterals as well as bilaterals.
For the benefit of those who consider multilateral or bilateral support as a grant it maybe relevant to point out that (i) multilaterals provide lending either at market rate as determined by LIBOR which forms the bulk of their lending portfolio or concessional funding, with an interest rate of one percent.
The total amount allocated to each country under concessional funding varies over time as it is linked to performance (and Pakistans economic performance is rated as poor, accounting for a decline in support under this funding); (ii) bilaterals have not been as forthcoming in assistance to Pakistan as was originally thought, attributed to the global financial crisis and the resulting recession; (iii) external committed disbursements in November last year have not all found their way into our treasury. Advisor to the Prime Minister on Finance Shaukat Tarin was at pains to state that multilaterals are going to inject just over 1.5 billion dollars by the end of the current month, as committed, but he did not mention the debt servicing bill that would accrue to our next years budget or indeed the terms of these loans which are expected at market interest rates.
Third, there has been no privatisation at all and this particular source of government revenue has, therefore, not been realised. This is not to state that privatisation was appropriate given the current state of the global as well as the Pakistani economy but just to emphasise that this source of revenue has not been realised as envisaged in the LoI.
Fourth, the instruments noted in the LoI including treasury bills and other domestic financing instruments have generated funds for the government to make ends meet and go some way in explaining how the government would be able to retire 100 billion rupee debt to SBP.
Pakistan economy is certainly not out of the woods yet and Tarin must realise that until and unless he can effectively lubricate the wheels of the productive sectors that would increase domestic output with a consequent positive impact on GDP, (considered an impossible task given the continuing load shedding as well as high rates of interest - two major inputs of productive sectors), the countrys ability to meet its targets as set by the IMF will remain a challenge.
Tarin is also stating that the cost of the war on terror has raised defence expenditure, however, the government has not yet been able to sell the idea that it is no longer profligate in its own spending. A lot needs to be done to not only build the trust of the donors but also of the people of this country before the government can generate support for its policies - necessary prerequisites to steer the economy out of the current impasse.