Total debt and liabilities: the big picture

Opposition parties and a section of the media have been holding the present government responsible for borrowing excessively from various sources to finance the budget deficit in the outgoing year. This does show the PTI government in a bad light and suggests that it is unable to manage the fiscal position properly. The example often quoted in this connection is the amount of Total Debt and Liabilities (TDL) which are reported to have surged by Rs 11 trillion during 2018-19. There is however the need for trying to concentrate on the big picture and not be distracted by details.
The Ministry of Finance has given - through a timely clarification - the breakdown of the increase in borrowing to establish its case, analyzing the five components of the TDL in detail. First component, according to the Ministry, was Total Public Debt that had increased by Rs 7.75 trillion, out of which Rs 3.44 trillion (44 percent) was borrowed for meeting the budgetary deficit; Rs 3.03 trillion (39 percent) was due to currency depreciation, Rs 1.02 trillion (13 percent) was offset by higher cash balances necessary for effective cash management as the government is committed to zero borrowing from SBP in future, and Rs 0.26 trillion (3 percent) was the difference between face value and realised value of PIBs issued during the year. Second was the rise in Foreign Exchange Liabilities by Rs 1.09 trillion due to increase in foreign currency deposits with the SBP by Rs 0.73 trillion and currency depreciation of Rs 0.36 trillion. Third, the PSEs borrowed Rs 0.65 billion and the increase was largely due to additional borrowings of Rs 0.50 trillion and Rs 0.15 trillion due to currency depreciation. Fourth, external debt of private sector rose by Rs 0.9 trillion, out of which Rs 0.75 trillion represented currency depreciation. And finally, debt for commodity operations decreased by Rs 0.06 trillion during the year.
In view of the above, it is quite clear that the criticism on the PTI government by the opposition parties and the media for excessive borrowings to meet the budgetary deficit is not fully justified. Out of the total increase of Rs 10.33 trillion in TDL during FY19, only Rs 3.44 trillion was spent on financing the fiscal deficit, while Rs 0.5 trillion was borrowed by the PSEs for spending on their own needs. Retirement of Rs 0.06 trillion for commodity operations was, of course, a welcome development. The increase of Rs 0.26 trillion in public debt was due to the difference between face value (used for recording of debt) and the realised value (recorded as a budgetary receipt) of Pakistan Investment Bonds (PIBs) issued during the year and was merely the result of accounting policy relating to long-term bonds. The biggest increase of Rs 4.27 trillion was due to currency depreciation which was the result of absolutely wrong exchange rate policies of the previous government which had led to a record C/A deficit during FY18 and forced the present government to depreciate the rupee by a substantial margin. If the previous government had taken timely action on exchange rate adjustment and not insisted to keep the exchange rate stable at all costs, the external sector position of the country would have been much better and there would not have been any need to approach the IMF for a bailout package. In view of the above, most of the increase in TDL was due to the failure of the past government to follow sound policies in the external sector. The present government merely went for a course correction, without which the country would have been in greater trouble and facing the prospects of insolvency by now. It will be interesting to note that TDL during FY18 had also risen by Rs 4.8 trillion. As such, the fiscal developments during FY19 was almost a continuation of a trend which would have serious implications for the economy and, therefore, must be reversed for avoiding excessive borrowings for financing the budget deficit and putting the economy on a sustainable path of development. In our view, the Ministry of Finance was right to clarify the situation but it does not absolve the present government from taking wide-ranging measures at the earliest to improve the fiscal position of the country. The tough stance that it has taken on mobilising higher level of revenues is understandable but its results are not fully evident as large swathes of wholesalers and retailers continue to resist this effort. This effort at resource mobilisation needs to be augmented with reduction in expenditure to tackle the large fiscal deficit that the country is struggling to deal with. In fact, tax revenues during the first two months of the current fiscal have fallen short by Rs 64 billion of target and that is not a good omen for the fiscal outcome in the coming weeks and months.