EDITORIAL: The government borrowed up to 77 percent domestically to finance its fiscal deficit in the first six months of the current year with interest, a component of current expenditure, rising to 4.2 trillion rupees of which 3.69 trillion rupees was on domestic debt – around 58 percent of what was budgeted for the year at 6.4 trillion rupees.
Subsequent data indicates that the Caretaker government upped its reliance on domestic debt due to the prevalence of a very high interest rate as a consequence of sustained poor rating by international rating agencies that disabled the authorities from borrowing the budgeted 6.1 billion dollars from the commercial banking sector abroad as well through issuance of sukuk/Eurobonds (debt equity).**
There has been no update on the rise in domestic debt during the second half of the current year though the State Bank of Pakistan website gives a provisional figure of domestic debt and liabilities at 43.4 trillion rupees as of March 2024 against 42.5 trillion rupees in December 2023 - a rise of 2 percent in three months.
If one adds the fact that the bulk of this borrowing was through issuance of Pakistan Investment Bonds the relevance of the high discount rate - at 22 percent - as a contributor to domestic indebtedness as well as fuelling inflation is clear.
What is baffling is the observation by the International Monetary Fund in the second and final review of the Stand-By Arrangement that “monetary policy should remain data-driven and attentive to stickiness in core inflation, as well as resolutely address any emerging risk.” If the policy rate was data driven then with the April Consumer Price Index of 17.3 percent and core inflation of 13.1 a 22 percent discount rate does reflect that it is data driven.
And as per Pakistan Bureau of Statistics data, which is challenged by independent economists to the tune of plus 2.5 to 3 percent CPI and core inflation have both been on a consistently downward trajectory and hence this attentiveness is not merited.
The risk is the tendency of the Pakistan Bureau of Statistics (PBS) to understate the rate of inflation by taking the lowest (read subsidised) rather than the average utility charges and the price of subsidised commodities in the Utility Stores irrespective of their availability in those stores.
Business Recorder has been urging Pakistan economic team leaders to focus on slashing current expenditure, which would require a massive sacrifice by influential groups, the suggestion is to limit all procurement expenditure that can be deferred for a year or two, not to insist on a pay raise for public sector employees, paid for by the taxpayers, as private sector has been unable to give a raise to its employees due to the five- to six-year-long economic impasse.
This would also create a leverage with the lenders in terms of phasing out harsh upfront conditions, and thereby provide some relief in terms of a lower raise in utility rates through administrative measures.
Concurrently, this newspaper would suggest to the IMF to begin evaluating its programme design to determine whether its prescriptions are suited to unique economic conditions that prevail in different countries as well as in Pakistan.
This is not to deny that Pakistani governments over many decades have not been severely remiss in implementing policies that are based on political as opposed to economic considerations, a fact that accounts for the steady erosion of all major macroeconomic indicators as well as sector that are partially stabilised with borrowing from multilaterals and bilaterals as well as domestically but once a semblance of stability is reached reforms are abandoned.
It is therefore imperative that there be internal introspection by the Ministry of Finance though sadly it appears that the IMF team is engaged in insisting on the implementation of its own flawed design with the economic team capitulating based on its overarching need to access foreign loans and is not focused on reducing current expenditure.
Copyright Business Recorder, 2024
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