The auction plan for the sale of government securities for the last quarter of FY12 released by the State Bank of Pakistan could be interpreted as a message to the market that the fiscal position of the country is very precarious and it has no other way to finance the budget deficit except to rely heavily on the financial institutions to fill the widening gap between revenues and expenditures.
Out of the whopping amount of Rs 1,085 billion, which the government intends to borrow from the banking system during this period, Rs 995 billion would be raised through the sale of treasury bills, Rs 40 billion through the sale of Pakistan Investment Bonds (PIBs) and Rs 50 billion through the three-year Government of Pakistan Ijara Sukuk. In all, around seven auctions of treasury bills of three, six and 12 months' maturities will be held during April-June, 2012.
Huge amounts of Rs 200 billion and Rs 180 billion are planned to be raised from auctions to be held on 18th April and 2nd May, respectively. Two auctions for the sale of PIBs to mobilise an amount of Rs 40 billion will be held on April, 25 and May, 23 respectively while tenders for another Rs 50 billion for the sale of Ijara Sukuk would also be held during the quarter.
The government's plan to borrow over Rs 1 trillion from the financial system during a short period of only three months as unveiled by the State Bank seems to be a clear recognition of the fact that government has failed to follow a prudent fiscal policy and would not be able to meet the annual budgetary targets. As the year is progressing, it is becoming clearer that the government will not be able to contain the budget deficit to 4.7 percent of the GDP and an overwhelming part of the fiscal deficit would have to be financed through borrowings from banks due largely to the non-availability of promised budgetary resources from other sources like CSF and 3G licences.
Rising losses of PSEs, occasional handouts to settle the circular debt, mounting resistance to the increase in domestic oil prices in line with the trends in the international market, continuing war on terror etc are also making it difficult for the government to contain the budget deficit within reasonable limits.
According to a report issued by the State Bank, the government's total debt had already increased from Rs 10.176 trillion at the end of June, 2011 to Rs 11.419 trillion till February 29, 2012 or more than Rs 1.2 trillion during the first eight months of the current fiscal year. The borrowing plan for the current quarter is an indication that the government debt would continue to increase at an alarming rate, posing huge risks to the economy and mortgaging the potential earnings of future generations of the country.
There seems to be more emphasis on revenue collection with no focus on the expenditure side of the Budget. Both the expense on subsidies as well as administrative expense will be larger than envisaged in the Budget projections. This is primarily due to the failure of the political leadership to implement the devolution dividend in the aftermath of the 18th Amendment.
Federal responsibilities that have devolved to the provinces have not materialised. The manpower in these eight ministries and departments thereunder remains in place on the pretext that provinces are not willing to absorb these federal employees and programmes.
This vital issue needed to be sorted out in the Council of Common Interest. The principle applied for the break-up of "West Pakistan" under the Yahya military regime needs to be replicated and persons need to be sent to the home province.
Borrowings by the government on such a scale would have been somewhat justified if the financial institutions had a lot of surplus liquidity, waiting to be invested somewhere to earn a decent rate of return but this is not the case. Banks are reported to be investing heavily in the government paper and as a consequence, facing a liquidity crunch, forcing the State Bank to pump almost Rs 250 billion to Rs 350 billion each week to keep the banks liquid. Printing of currency notes in high doses by the SBP has already resulted in inflationary pressures in the economy and added to the miseries of people.
The rate of inflation continues to be almost in double digits and the CPI was up by 1.2 percent in March, 2012 as compared to the previous month. The disinclination of banks to extend credit to the private sector due to better opportunities for investment in the government paper has also resulted in lower investment and stagnant growth, which, in turn, is also adding to the inflationary pressures in the economy. Exogenous factors are also quite inimical at the moment.
High prices of oil and food items in the international market and a steady erosion in the rupee rate are negative factors, worsening the inflation outlook. Although it is difficult to predict the behaviour of the monetary policy in the future, yet the State Bank cannot be expected to reduce the policy rate in its MPS to be announced on 13th April. The current account deficit of the country is also increasing and its consequences for exchange rate stability and foreign exchange reserves are obvious.
All the analysts agree that the only way to get out of this bleak scenario is a complete restructuring and reforming of the fiscal system of the country but, given the political implications of adopting such a strategy in an election year, the government appears to be highly reluctant in mounting the needed effort. In a situation like this, the nation could only hope for better sense to prevail in the relevant quarters to avert the unfolding crisis.
Pakistan will have to address the structural issues to get out of the fiscal mess in the wake of the 7th National Finance Commission Award. This involves deletion of the devolved ministries from the federal Budget, handing over the electricity distribution companies to the provinces, forcing the provinces to finance commodity operations such as wheat and allowing them to subsidise whatever they want.
Only then will the federal government be able to reduce the taking of future debt. Debt servicing now has the largest call on the Federal Budget. A bipartisan approach is required, as exhibited in the passage of the 18th, 19th and 20th Amendments to the constitution, to address the structural problems, and, put the economy on a sustainable growth path. Without a democratic consensus among the Federating units on the economy, consolidation of the Federation itself is not possible.