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Foreign and domestic debt payments dominate budgetary allocation in Fy 2017-18

Contrary to popular belief, the biggest expenditure item in the 2017 budget is ‘interest’, not defense or education or any other services for the citizens. In fact, the amount of interest exceeds the total amount of defense, health and education combined. Interest payments account for almost 40% of the total budgetary allocation. The accumulation of deficits results in the need to seek funds from the IMF and other sources, which come at the cost of ‘interest payments’ to the country as there is no such thing as a free lunch. In addition, the IMF imposes many other conditions on us which end up causing pain and suffering to the citizens of the country. Below are some of the extracts from the recent reports by IMF and World Bank on the state of Pakistan’s economy:

According to IMF report, Pakistan has recently ‘successfully’ concluded $6.6 billion loan program spanning over a period of 15 years. However, there still are a number of challenges in the fiscal, external, and energy sectors that could affect the hard-won stability gains in the period ahead. While stating that Pakistani economy is out of danger, strong efforts are required with respect to fiscal consolidation and the implementation of key structural reforms, and vigilance in managing the country’s external position. IMF projects a higher than expected current account deficit which means that Pakistan’s financing requirements would multiply as foreign expensive borrowings will increase. The domestic debt has grown out of control as well. The pros are improved global economic conditions, rising investment related to the CPEC and recovering agriculture whereas the cons are slower-than expected growth of large-scale manufacturing and stagnant exports.

According to World Bank’s biannual South Asia Economic Focus Report 2017, Pakistan’s growth prospects continue to improve if inflation remains contained. However, weak fiscal performance and pressures in the external account pose a challenge. Efforts to reverse the current imbalances and continued implementation of structural reforms would be needed for sustaining and accelerating growth and improving welfare.

 

ANALYSIS ON SPIRALING DEFICITS

Two aspects of our economic environment that weigh down on growth are the huge (effective) share of indirect taxes in tax revenue and the second is the declining contribution of national savings to national development. Instead of fueling growth, savings are largely recycled by banks to serve governments’ fiscal needs. Indirect taxes are already, effectively, 85 percent of FBR’s tax take (if the non-income based aspects of direct taxes, such as withholding taxes, are considered).

The cost of debt servicing has already risen faster than the projected level by over Rs170 billion. It appears that the debt overhang is imposing a more unsustainable burden. In the first nine months, the share of interest payments in federal current expenditure stands at 45 percent. This is significantly higher than the corresponding percentage of 39 percent in 2012-13. Consequently, development expenditure and social protection programs are being ‘crowded out’. Adding fuel to fire is the issue of circular debt which has once again sky rocketed to the level of Rs400 billion.

The implications of fiscal deficits imply recourse to inflationary financing through more printing of money by the State Bank of Pakistan (SBP), given the limits to inflows from other sources. Deficit financing has already approached Rs1 trillion by the end-March this year. It could go beyond Rs 1.5 trillion next year. In the face of such expansionary fiscal and monetary policies, the inflation rate target for 2017-18 of 6 percent looks low. Second, more pressure will be put on imports due to higher aggregate demand. As such, here also the target current account deficit projected for 2017-18 is at the low side at $10.4 billion. It could exceed $12 billion, following which Pakistan may have to rush into another IMF program.

RECOMMENDATIONS

The budget situation does not seem to get better and the recent governments have certainly not attempted to reduce debt or develop a coherent strategy to improve the overall budgetary situation.

Pakistan’s budget is out of alignment as there exist some structural imbalances. The government need to start taking action to address the structural issues within our national budget and ensuring that the revenues and expenditure match. Pakistan is well poised on the path of upward trajectory however it is marred by debilitating bureaucracy, middling policies and weak institutions. The biggest hurdle is transparency. Some of the recommendations are as under:

1- Economic policies in the period ahead need to focus on preserving the hard-won stability and addressing emerging as well as medium-term challenges, notably in the fiscal, external, and energy sectors.

2- Greater exchange rate flexibility and efforts to improve export sector productivity are needed to address the widening trade deficit as well as strengthen the economy’s ability to absorb medium-term China-Pakistan Economic Corridor (CPEC)-related and other capital outflows.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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