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Fiscal risks need to be managed to ensure speedy economic growth

Like other middle and low income developing countries, Pakistan is continuously faced with consistency of fiscal risks endangering its economic stability. As such public finance policies and strategies need to be managed keeping in view ways and means to generate needed revenues through taxes and other sources to cover expenses on public sector development programs and also to meet current state expenditures.

In the face of increasing budget deficit, it has become a problematic issue how to manage existing public debt and extend borrowings for matching budgetary allocations for required security arrangements through various segments of defense related institutions to combat increasing terrorist activities in the country and frequency of trespassing incidents at international borders.

Besides that impact of global financial crisis has gradually crept into country’s economy resulting in substantial reduction in exports’ growth rate and also reluctance of super powers to reimburse agreed actual due amount spent on combating activities on adjoining borders has worsened fiscal deficit position and public debt burden has mounted to Rs17.83 trillion by June 2016 out of which external borrowings had stood at Rs6.05 trillion almost 34 percent of the total debt.

No doubt government has vehemently diverted all efforts to manage public finance portfolio and reduce the total public debt to the level when it will comfortably be 60 percent of the GDP. In this regard strategy adopted is to stagger the repayment and refinancing of debt by rescheduling the repayment or re-rolling existing debt taking into account new suggested period and cost involved due to change in interest rate by debt giving agencies both internally and externally.

Incremental rate of external borrowings has no doubt increased in 2016-17, yet simultaneous increase in forex reserves has eased up the position. In three years time external debt has increased from $48.1 billion to $57.7 billion, which gives incremental rate of 6.3% per annum as stated by Ministry of Finance. Part of this increase has come from IMF loan, which was taken for balance of payment support and also for repayment of defaulted installments.

Despite these corrective measures and initiative taken on the part of Ministry of Finance, the position of revenue generation lags behind the quantum of expenditures, which continue to grow at a faster rate, which according to a news item appearing top Pakistan’s daily in March 2, 2017 government is set to acquire Rs2.1 trillion in a period from March to May 2017 through auctioning of T-Bills and Pakistan investment Bonds to meet the gap between revenues and expenditures, which is likely to rise to 4.5-5 percent of GDP by the close of current fiscal year.

Accordingly, country is consistently faced with reliance on internal and external borrowings and debt servicing is making big dent on revenues generated. No doubt reliance has substantially increased on domestic borrowings mostly through borrowings from banks. Domestic debt as on 31st March 2016 had stood at Rs13.39 trillion and accordingly for the budget of fiscal year of 2016-17 about Rs10.33 billion have been earmarked for debt servicing, which is almost 46 percent of the total targeted figure of revenues to be generated. This includes interest cost of Rs1.24 billion.

Government efforts to rectify fiscal position has failed to yield desired results due to various fiscal indiscipline like allowing tax amnesty every now and then to people amassing ill gotten money, allowing wholesale subsidies on electricity, essential food items and oil (when prices were very high in international market). Besides that heavy expenditures incurred on handling natural disasters like frequent drought and sometimes heavy flood conditions in all the four provinces created several fiscal imbalances.

In order to reduce public debt to manageable level and to sustain it, it is essential that well defined debt strategy is adopted and borrowed funds are used efficiently and specifically for the purpose these have been acquired.

Government need to rely on long term borrowings instruments like Pakistan Investment Bonds and Sukuks rather than going for short term debt, which proves rather costly.

Diversity and frequency of fiscal shocks encountered by Government of Pakistan needs handling of fiscal deficit outcomes through innovative strategies. As reported in one of the World Bank’s publication, Mexico in order to overcome fiscal shocks resultant of natural disasters introduced catastrophe bonds in order to transfer the fiscal impact of such situations to investors. It is stated in the report that “if specified catastrophe occurs investors forgive the Mexican government’s debt. If the catastrophe does not occur the government continues to pay out principal and interest, just as for an ordinary bond”.

Further to hedge up probable fiscal risk provision should be made in the budget for expected cost. For example in the face of volatile condition of security status of the country provision should be made for a little more than envisaged expenditure on security for any probable outburst.

According to above stated report developing countries usually encounter unexpected bail out expenditures of troubled state owned enterprises and sudden demand from provinces or cities for financial assistance, which bring damaging impact of 8 and 3-1/2 percent respectively on GDP of the country concerned. Similarly natural disaster on average bring dent of around 1- 1/2 percent of GDP.

In case of Pakistan issue of contingent liabilities also stand as a fiscal risk. Contingent liabilities are usually the guarantees or rather sovereign guarantees issued to public sector entities to enable them to improve their financial viability and acquire loans from internal and external financial institutions on comparatively favorable terms. During last fiscal year government issued around Rs104 billion fresh guarantees and rollover guarantees over and above outstanding/accumulated amount of Rs663 billion. Issuing of such guarantees is, however, regulated under Debt Limitation Act 2005, which stipulates that amount of guarantees issued by government should not exceed 2% of GDP in any financial year inclusive of all expenses relating to issue of such guarantees. Even renewal of existing guarantees is also to be taken as issue of fresh guarantees. It is essential for the government that to ensure no fiscal risk/shock relating to issuing of sovereign guarantee , provisions of Debt Limitation Act of 2005 are strictly adhered to.

Besides that, in order to ensure that no adverse NFC award repercussions are reflected on fiscal position of the country the condition specifically mentioned in the award is that federal and provincial governments will streamline their tax collection system on priority basis to increase their revenues to the extent that 15 percent tax-to-GDP ratio is achieved by 2015, which till now remains as a distance dream. However all efforts should be mobilized to improve tax-to-GDP ratio to the targeted level as envisaged in current year fiscal budget.

Expected in flow of funds through China-Pakistan Economic Corridor(CPEC) project is likely to ease up the situation. New projects coming up under the program would create employment opportunities and will add to government revenues through direct and indirect taxes. For servicing external debt substantial increase in exports is essential requirement for a debt-ridden country. It is hoped that stagnant export volume would start improving after CPEC project gets through as several countries have shown interest for investment in related projects, which is likely to result in sizeable increase in exportable goods and services combined with diverse destinations of exports.

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