EDITORIAL: The economy clearly seems on the mend. The IMF programme is under way, inflation has dropped significantly, reserves have improved, the rupee has stabilised, and the government has also taken the significant step of initiating a buyback of short-term T-bills.
Yet headlines still speak of the federal government’s debt stock crossing the Rs70 trillion mark at the end of August, an all-time high, primarily due to borrowing to finance the fiscal deficit.
That means a total borrowing surge of 2.1 percent, or Rs1.448 trillion, during the first two months of the ongoing fiscal year.
Although both domestic and external debt increased, the major growth was in the former –- up Rs1.179 trillion in just two months. Surely, this cannot go on indefinitely because if the government continues to borrow at this rate to finance the deficit, the hard-won gains of the last year or so will ultimately go waste.
It’s also pretty clear that despite recent successes, the government is unable to sort out the current account. And, as so often lamented in this space, it is primarily because it is not focusing on trimming expenditures by as much as it should. Even the IMF programme, which has finally forced authorities to initiate long overdue reforms in a number of sectors, does not go into details about expenses, but just focuses on the final figure.
Yet as much as the government has tried to expand its revenue base, it is still forced to borrow extraordinary amounts to keep the budget balanced; and that is by no means sustainable in the long term. It must focus attention on plugging leakages and cutting expenditure on the government side.
The way the finance ministry is approaching cost-cutting, by shutting down redundant departments, etc., will fetch fancy headlines but it will do nothing for the current account. Especially since authorities continue to lavish themselves with perks and privileges, which are a continuous drag on the exchequer.
And, in times when people are still reeling from years of historic inflation and unemployment, and their real incomes have not yet recovered, it makes for bad economics, politics and optics to favour one class, with government jobs, over another, the majority that survives in the private sector.
One would have hoped that the close shave with nothing less than sovereign default just last fiscal would have jolted the government into exercising fiscal prudence. But that does not seem the case. Sure, it has engineered an impressive turnaround in the economy even though, truth be told, the bulk of the work was done by the independent state bank’s hawkish squeeze on money supply and the ordinary people who paid for the incompetence and blunders of the ruling class.
Yet, however, a semblance of stability has been achieved, it is important to consolidate at this point. And unless the government cuts its own weight, it will be forced to borrow to keep the deficit in check. That’ll bloat the long-term debt all over again, and since much of the borrowing is done in the local market it will also crowd out private sector investment when interest rates have finally started dropping.
This is another pattern that keeps repeating itself primarily because the government does not get out of the way, for which it will have to control its own running costs.
It cannot really be stressed enough that the one sure way to keep the current account in some sort of check is to rationalise the expenses column.
A finance minister that spent his life in international banking was expected to lead with such policies. That, sadly, hasn’t happened so far. But unless it does, there’s always the risk of squandering the precious gains of the last few quarters.
Copyright Business Recorder, 2024
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