National savings rate is an important indicator of an economy’s financial health, and its identity with investment determines how much a country needs to borrow domestically (deficit financing, a highly inflationary policy) and from external sources (access to savings of another country) to meet its domestic investment needs.
Three very disturbing elements present in the budget exercise in Pakistan continue to this day and require an urgent revisit. First, the amount of federal and provincial public sector development programmes in annual budgets (consisting of physical and social infrastructure projects) are typically overstated at the start of the year to dishonestly claim greater commitment to development in comparison to previous administrations, but are mercilessly cut by the end of the year to contain unsustainable budget deficits. Needless to add, government development expenditure is an engine of growth in this country especially as private sector investment remains hostage to flawed monetary and fiscal policy decisions.
Second, massive domestic borrowing is from: (i) commercial banking sector which crowds out private sector borrowings. Today around 59 percent of government borrowing is from issuing Pakistan Investment Bonds (PIBs) with a rate of return linked to the discount rate which is at a high of 21 percent – a major factor in alarmingly upping the debt servicing component of the budget. The government’s prompt release of this borrowed money back into the economy on current expenditure items is a major cause of the runaway inflation in the country today; and (ii) accessing funds from national savings centre (NSC), or private sector savings.
On 8 April 2023, the interest rate on all NSC products was raised as noted below, ostensibly in line with the rise in the discount rate; however, none of the savings products raise was commensurate with the rate rise in the discount rate of 21 percent (raised on 4 April) lending credence to the general perception that the rise was to attract private savings: Special Savings Certificates rate rose by 4.13 percent to 17.13 percent, Savings Accounts by 4 percent to 18.50 percent, on Short Term Savings Certificates by 3.86 percent to 19.82 percent and on Bahbood Savings Certificates and Pensioners Benefit Account by 2.64 percent to 16.56 percent.
However, with April’s consumer price index of 36.4 percent and the Sensitive Price Index for the week ending 18 May 2023 at 45.72 percent the general public’s capacity to save after meeting its consumption requirements remains severely compromised.
And finally, foreign borrowings. In the current year’s budget external borrowing requirements were projected at between 35 to 40 billion dollars (including repayments of around 25 to 26 billion dollars, and the remainder for budget support as well as to shore up foreign exchange reserves) but so far inflows have been less than 15 billion dollars.
External borrowing today remain hostage to the pending staff level agreement on the ninth review with the International Monetary Fund (IMF) though the three friendly countries notably China, Saudi Arabia and the United Arab Emirates have indicated their intent to meet earlier pledges (rollovers and additional lending). These pledges, as per the Fund, are insufficient to meet the country’s requirements. Borrowing from the commercial banking sector abroad or incurring debt equity through issuing sukuk/Eurobonds are no longer economically viable propositions as the three international rating agencies have downgraded Pakistan to junk status.
Foreign currency accounts are allowed in Pakistan though the major chunk of foreign savings by Pakistani residents are not held in domestic foreign exchange accounts (which at last count were around 5 billion dollars), but in banks abroad with several finance ministers including the incumbent claiming that Pakistanis bank abroad to the tune of at least a 100 billion dollars. However, no finance minister succeeded in attracting these savings back to Pakistan: had they relied on improving key macroeconomic fundamentals rather than on amnesty schemes they may have been more successful.
Foreign exchange reserves remain appallingly low today compared to previous years. Three observations are in order: (i) from 11 May 2011 till April 2012 when the PPP-led government was in power SBP held three to four times more foreign exchange reserves than those placed in the private sector foreign exchange accounts. By late 2012 to early 2013 SBP reserves began to decline and by April that same year the differential was no more than 1.5 billion dollars between the two in favour of the SBP; (ii) after Nawaz Sharif’s government took oath in June 2013 the reserves held by SBP continued to plummet reaching a low of 2,963.1 million dollars while reserves with banks were 5097.3 million dollars on 6 December 2013, a major reason for the loss of the external value of the rupee.
SBP reserves did not overtake the reserves held by private citizens until 28 March 2014 with the difference in SBP’s favour strengthening thereafter which may be attributed to not only the 1.5 billion dollar Saudi grant but through other borrowings including equity borrowing (issuance of sukuk/Eurobonds at rates well above the international rates). The rationale provided by the then Finance Minister Ishaq Dar was that it was cheaper to borrow in dollars at a rate around half of that available in the domestic market.
What he obviously failed to comprehend is that the almost natural average rupee depreciation every year is between 3 to 4 percent, which would make external borrowing prohibitively expensive at the time of repayment. He also failed to project at the time and refuses to accept this as a serious policy flaw to this day that heavy reliance on external borrowing was tantamount to a suicide attack on the economy especially as he used the bulk of this borrowing to prop up the rupee value just so he could understate the debt servicing/repayment component of the budget; and (iii) the total held in foreign currency accounts has not varied by more than 200 million dollars plus/minus since January 2023 when the rupee dollar parity was decontrolled on IMF insistence. This could well be because there is a cap on withdrawals at present and the cap is determined by the bank manager guided by strict rules.
To conclude, there are two possible ways the government can emerge from this destructive cycle of ever rising reliance on borrowing – domestic and external. Slash its own expenditure by at least 1.5 to 2 trillion rupees in next year’s budget that would reduce the need to rely on domestic private and foreign savings. And secondly, to allow private investors access to private sector savings so that private investment is no longer a function of monetary and fiscal incentives.
Copyright Business Recorder, 2023
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