The latest estimates by the IMF about the financing needs of the economy are so disturbing that they should serve to sound the alarm in the relevant quarters. According to its Fiscal Monitor for October, 2012, Pakistan will require a gross financing of 30.2 percent of GDP to meet its debt obligations and to finance a projected 6.4 percent fiscal deficit in the current fiscal year.
The problem has become particularly serious because of excessive short-term borrowings by the present government during the last four years due to the widening gulf between its revenues receipts and expenditures. The country's increasing reliance on borrowings has increased its total gross debt to 62.4 percent of GDP from 60.2 percent a year ago and net gross debt (excluding foreign exchange reserves) to 59.1 percent of GDP in the current financial year from 56.9 percent in the previous year. Country's total revenues are projected at 12.8 percent of GDP as against an expenditure level of 19.2 percent, reflecting a massive shortfall of 6.4 percent of GDP.
The deficit of 2.1 percent of GDP in primary balance - revenue minus non-interest expenditures - indicates a persistent heavy reliance of the country on borrowings in the near future. As per the IMF projections, in rupee terms, the country will require a financing of Rs 1.51 trillion to finance the fiscal deficit in the current fiscal year, besides Rs 5.6 trillion for maturing debt, including dollar 2.8 billion repayment to the IMF for Stand-By Arrangement. The matter is so serious that security-related expenditures and debt servicing now constitute 85 percent of the current expenditure and around 68 percent of the total expenditure.
The present situation, by all indications, was alarming, to say the least and the country would indeed face an uphill task to meet its financing requirements if some drastic measures are not taken to reverse the deteriorating trend. Obviously, what the IMF has said is not something new but is the result of financial mismanagement spanning over the past few decades and known beforehand to the relevant authorities of the country. We say this because the Fiscal Responsibility and Debt Limitation (FRDL) Act, 2005 was specifically meant to check profligacy, force governments to live within the available means and maintain fiscal discipline for all times to come. Alas, such a wholesome law passed by the parliament with high hopes has been violated with impunity. For instance, the FRDL stipulates to reduce the revenue deficit to nil by June, 2008 and total public debt to be under 60 percent of GDP by June, 2013 and maintain this position in the subsequent years. The latest data, however, shows that the government will not be able to abide by these provisions; it will be obliged to take the matter to the parliament, indicating its compulsions for the departure from the principles as laid down in the Act and the period of time it "expects to take to return to those principles". Even if we forget various provisions of the Act, the consequences of such an imprudent fiscal policy and mounting burden of public debt are obvious in terms of runaway inflation, fast depreciation of PKR, depletion of foreign exchange reserves, uncertainty in investment planning etc. Obviously, Pakistan will never like to follow the example of countries like Zimbabwe which had to face hyper inflation and a profound decline in productivity for a long period of time. Even developed countries like Greece and the USA are now experiencing the damaging after-effects of fiscal mismanagement in the past.
There is absolutely no doubt that Pakistan needs to revert to fiscal discipline, at least as ordained in the FRDL Act, as soon as possible to ensure financial stability and solvency of the country as well as to create conditions which are conducive to growth. It was good to see that, realising the gravity of the situation, Finance Minister Abdul Hafeez Shaikh rushed to the IMF, probably in the hope of getting some relief in one form or the other. However, whatever route we take, the remedy would be the same. Previous SBA was terminated in between mainly because of government's failure to implement the agreed RGST regime and raise sufficient revenues. Now the IMF has again asked Pakistan to tackle the bloated budget deficit by widening the tax base, reducing subsidies, reforming tax policy and boosting tax compliance. Obviously, the outsiders including the multilateral financial institutions would not come to our rescue if we don't try harder to help ourselves by tightening our belts. The truth must be told to the nation that there are no shortcuts and almost everybody has to make sacrifices to keep the economy afloat. In the short run, however, the pain of adjustment could be eased somewhat by rescheduling and assistance from other sources but this is not the real solution to an endemic problem. In the First Post-Programme Monitoring Discussions with Pakistan, the IMF has highlighted the fact that deep-seated structural problems and weak macroeconomic policies have continued to sap Pakistan's economy of its vigour. GDP growth is insufficient to achieve improvement in living standards and absorb the rising labour force, energy problem continues to worsen, external position has weakened substantially and fiscal deficit climbed as high as 8.5 percent of GDP during 2011-12 and is expected to be 6.5 percent of GDP during the current year. Monetary policy has accommodated large fiscal deficits. Of course, the situation is compounded by uncertain global environment and a difficult domestic situation but Executive Directors of the IMF have again underscored the need for reducing large fiscal deficits for restoring macroeconomic and external stability through comprehensive revenue and expenditure reforms. After reading the press statement issued after the discussions, it becomes quite clear that the IMF or any other multilateral agency would not be prepared to help in a meaningful way if Pakistan is not able to meet certain upfront conditionalities for fiscal consolidation. The IMF prescription would be to raise interest rates, depreciate PKR and curtail the budget deficit by putting a cap on budgetary borrowing from the SBP and a floor on SBP forex reserves. It is termed a quarterly "performance criteria" with targeted Net Domestic Assets (NDA) and Net Foreign Assets (NFA) of SBP. In order to achieve this, a menu of choices would be offered to Pakistan. Upfront conditionalities could include imposition of RGST in VAT mode, raising SBP policy rate and market determined valuation of the Rupee prior to disbursement of funds. Pakistan would also need to agree to undertake structural changes such as privatising the loss-making PSEs; reducing the size of the government to cut down recurring expenditure; and increasing the tax base. But so far no democratic or quasi-democratic government has fully fulfilled commitments. The fault lies in our stars! In short, the route to save the economy from the impending crisis is obvious but whether or not we have the required will to implement necessary measures and stomach their impact with patience is a profound question begging for plausible answer.
The present government, which is facing an election, may be hesitant to stomach the upfront conditionalities and wait for a caretaker set-up to sign with the Fund. We are afraid that the Fund, this time, may not sign-up with the interim government and would wait for the new elected government to be in place to sign the new structural adjustment programme. The question that begs an answer is: Can the balance of payment (BoP) position be under control till end of the current financial year (with falling forex reserves ie until June 2013). Remember, Shaukat Tarin as Finance Minister in 2008, took an expensive 'bridge-loan' from the Fund as an insurance in case the expected flows from Friends of Democratic Pakistan (FoDP) failed to materialise. It is precisely this 'bridge-loan' which has helped the country to absorb the external shocks, ie, high oil import price and negligible foreign direct investment (FDI). Bird in hand is worth two in a bush. Last but not least. Our policymakers need to fully appreciate the highly perceptive argument that economic development greatly hinges on a single factor: a country's political institutions.
Comments
Comments are closed.