How much country's economic problems have been lessened by the support from friendly countries? To answer this question we need to fully appreciate what malaise is actually affecting our economy. We do so at the outset.
First, we have a huge fiscal deficit, significantly above 5%, persisting now for the third consecutive year. Last year it was registered at 6.6% (inclusive of the revenues that flowed on account of amnesty scheme). To see how grave a threat this poses, it is important to examine it from different angles. The revenue deficit gives us a measure of how far the income from tax and non-tax revenues are sufficient to cover the current or regular expenditures of the government. On a consolidated basis, during 2017-18, federal and provincial current expenditures were Rs 5.8 trillion while revenue receipts were Rs 5.2 trillion, leaving a gap of 0.6 trillion, which was nearly 1.82% of GDP. This essentially means that we are borrowing even for the purpose of paying salaries to our employees and utility bills for electricity and gas. What is more worrying is the revenue budget of the federal government. The federal revenues, net of transfers to provinces, were Rs 2.5 trillion whereas current expenditures amounted to Rs 3.8 trillion, leaving a deficit of Rs 1.3 trillion or nearly 4% of GDP. In addition, the entire development expenditure of Rs 890 billion of federal government is financed through borrowings. [Evidently, a much larger amount of current expenditures is financed from borrowings, as provincial governments spend a sizeable amount of transferred revenues on development spending]. This is reflective of the woeful state of fiscal finances of the country. It looks impossible to correct these imbalances except through far reaching structural adjustments on the pattern of public expenditures or raising more FBR revenues from their current pitiful level of 11.1% of GDP.
There is an even greater concern that remains masked in the maize of numbers. The notion of primary deficit gives us a measure of whether the path of debt accumulation implicit in the overall fiscal deficit (which is nothing but annual increase in the stock of debt) is sustainable or explosive. Primary deficit is defined as the difference between revenues and expenditures net of interest payments. If primary balance is in surplus, it means that after paying interest payments, something is available for repaying debts. If it is in deficit, it means we have to borrow even for paying interest on loans. Last year interest payment amounted to Rs 1.5 trillion. Net of interest payments, expenditures were nearly Rs 6.0 trillion, and excluding it from revenues of Rs 5.2 trillion, we have a primary deficit of Rs 0.8 trillion, which is 2.2% of GDP. This is too high a primary deficit and it is indicative of the fact that the debt stock is growing along a path that is explosive.
Although the above data relates to last fiscal year, the picture has not changed during the current year. In fact, there are chances that things are getting more challenging during this fiscal year.
Second, we have an external account deficit that is also threatening. Last year it was close to 6% of GDP, or nearly $19 billion. This year, in the first six months, current account deficit was nearly at the same level as last year. In fact, if the exceptional increase in remittances is excluded, the deficit is higher than last year's. Exports were flat while imports showed an increase of 3%. This means the massive depreciation of nearly 40% since July 2017 has had no impact in correcting the external account imbalance. On the other hand, the foreign exchange reserves are rapidly declining, even though intermittently they are bolstered by support from the friendly countries. In the process, foreign loans are also rising at an unprecedented speed.
Third, the outlook of economic growth is revised downward by all leading agencies, including the World Bank, IMF and the State Bank. The Kharif crops have not been up to the target whereas the Rabi season is reportedly facing significant water shortages. The production of large scale manufacturing (LSM) has shown a decline of 1% during Jul-Nov 2018 compared to the same period in 2017. Most significantly, there is a record slow-down in the development spending as government has already announced a cut of Rs 250 billion in an effort to contain deficit. All these developments are pointing to a significant slow-down in economic activities.
Fourth, there is a huge amount of unrecognized obligations not accounted for in the budgetary accounts. The Finance Minister, while speaking in the National Assembly on the mini-budget, pointed out that nearly Rs 3.5 trillion (nearly 9% of GDP) in unrecognized liabilities has been bequeathed to them by the previous government. Well, even if it is granted that all these liabilities were incurred by the previous government and had been left behind for payment by the new government (this is not a fact as the previous government had also inherited significant liabilities to an extent that former FM would normally quip that "I am not a finance minister but a minister for circular debt") then the correct course would be to give a road-map for how these would be settled. Leaving it in its present state would only lead to significant build-up on account of interest payments. Sooner or later, the country has to face-off this unrecognized government liability and find a way for its settlement. The earlier it is done the easier it would be to accomplish this task.
Finally, we also note an important aspect of new government's strategy that has not been helpful to lift the sagging spirits of economic agents. This relates to excessive focus on accountability and recovery of looted wealth. Even on the tax side, emphasis was on coercive measures rather than simplification and ease of compliance in payment of taxes. Consequently, investors, business and administrative machinery was scared of the consequences that may flow for their past actions or going forward. This environment, thus, was not conducive to unleash the potential of economic actors.
Now, in view of what has been stated above, these are the challenges the economy is facing. The support of the friendly countries is impervious to these challenges. All this support is doing is to delay the day of reckoning. Every time we get to a point where we would run out of reserves, a foreign support is injected into our body, giving it a life-line. The situation is akin to a patient who is constantly administered palliatives to kill the pain while underling malaise continues to afflict the body. The need for curing the disease doesn't go away in the process. In fact, one runs the danger that some vital organs of the body may be severely affected if the proper treatment - no matter how painful - is not provided. Accordingly, the support from the friends is no solution to our myriad economic problems.
(The writer is former finance secretary)
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