EDITORIAL: The federal government borrowed 608.5 billion rupees from banks during the first 105 days of the current fiscal year (1 July to 14 October) and retired only 37 billion rupees, statistics that indicate that the money was largely used for budgetary support - a policy that is not only highly inflationary but also signals that government borrowing maybe crowding out private sector borrowing regarded as an engine of growth and employment by economists.
During the comparable period last year reliance on bank borrowing was to the tune of 94 billion rupees notwithstanding the fact that during the Khan administration’s tenure reliance on domestic borrowing rose from 16.5 trillion rupees in 2018 to over 27 trillion rupees by end March 2022.
The question is why the incumbent government deemed it appropriate to raise reliance on bank borrowing especially at a time when the discount rate was a hefty 15 percent (since July 7 this year) while for the first week of July it was 13.75 percent.
It may be recalled that in 2019 when the discount rate was raised to 13.25 the then economic team leaders began to reschedule loans – a decision criticised not only by Shaukat Tarin, who was appointed as Finance Minister on 16 April 2021, but also by many a PML-N (Pakistan Muslim League-Nawaz) stalwart. Higher reliance on domestic borrowing at the existing rates has raised the debt servicing costs from what was budgeted in June this year and augers ill for containing the budget deficit.
The government may have been forced to raise reliance on domestic borrowing as: (i) the budgeted expenditure rise of a trillion rupees in the current year was simply untenable given the poor state of the economy; and disturbingly there appears to be no effort on the part of the government to lower/readjust these priorities, especially with respect to current expenditure, even subsequent to the onslaught of the devastating floods – a reduction that could have created some leverage with the IMF; (ii) the government claims bafflingly that disbursements to the flood victims are from reallocating budgeted expenditure from another identified budgeted allocation yet in that case the need for borrowing should have been less especially given that the budgeted Federal Board of Revenue collections have been more than budgeted; and (iii) the delay till late August in reaching the staff-level agreement with the International Monetary Fund (IMF) as requests by Pakistani authorities to phase out the extremely harsh fiscal and monetary policy prior conditions were not entertained which in turn led to a delay in the disbursement by other multilaterals/bilaterals, projected in the region of 40 plus billion dollars for this year alone – sources of external borrowing that necessitate a level of comfort from Pakistan being on a quarterly strictly monitored Fund programme to ensure the country remains on the agreed reform path.
And needless to add the current account deficit and the erosion of the rupee value led to a downgrade in credit rating by Fitch and Moody’s, thereby making any reliance on debt equity issuance, Sukuk/Eurobonds, at a rate of return well above the market rate.
In this context, the Prime Minister’s forthcoming visit to China to seek additional projects approval under the China Pakistan Economic Corridor may be seen as the only available source of direct foreign investment; however, care must be taken to read the fine-print and ensure that counterpart funding is affordable and the investment returns to the Chinese companies in terms of tariffs or raising other domestic taxes are what the public can bear.
Copyright Business Recorder, 2022
Comments
Comments are closed.