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Budget deficits, CPEC & circular debt

The federal government has recently sold the Pakistan Security Printing Corporation (PSPC) to State Bank of Pakistan (SBP) for Rs100 billion as it seeks to cover shortfall in its revenues that surfaced after the United States withheld Coalition Support Fund (CSF) disbursements. The PSPC will now operate as a subsidiary of the State Bank of Pakistan (SBP). Primarily, the transaction will be a book management which was aimed at getting an extra Rs100 billion from the central bank to meet non-tax revenue shortfalls.

For fiscal year 2016-17, the federal government had estimated receiving Rs280 billion from the central bank as SBP profit. However, the revised estimates showed that the SBP paid Rs228 billion profit to the federal government. Cumulatively, the central bank has given at least Rs328 billion to the federal government, which is one-third of its non-tax revenue receipts for fiscal year 2016-17 that ended on June 30. The central bank has paid Rs100 billion out of its “retained earnings”.

For the last fiscal year, the Finance Ministry’s non-tax revenue target was Rs959 billion, which it scaled back at the time of announcing new fiscal year 2017-18 budget. The massive shortfall in non-tax revenues due to less CSF disbursements by the United States necessitated the sale of the entity. At the time of making budget for fiscal year 2016-17, the Finance Ministry had estimated receiving Rs170 billion in defense receipts. However, the actual disbursements remained about Rs100 billion below the estimates.The sale will also help to keep overall budget deficit around 5% of Gross Domestic Product. But it will be still higher than 3.8% of the GDP target approved by Parliament. The government’s tax revenues also remained short of the target by about Rs250 billion.

For the last fiscal year 2016-17, the federal government had planned to list three power distribution companies at the Pakistan Stock Exchange to raise non-tax revenues. These entities were Faisalabad Electricity Supply Company, Islamabad Electricity Supply Company and Gujranwala Electric Power Company. The sales proceeds of these entities had been planned to be used for retiring the stock of the circular debt, which has again exceeded the level of Rs400 billion. But these transactions could not take place after the government rolled back the privatization program after end of the IMF program.

Deficit financing has already approached Rs1 trillion by the end-March this year. It could go beyond Rs1.5 trillion next year. In the face of such expansionary fiscal and monetary policies, the inflation rate target for 2017-18 of 6% 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.


With the surge of borrowings from China under the China-Pakistan Economic Corridor (CPEC), the State Bank of Pakistan (SBP) has admitted that a large chunk of power machinery from China is being imported without using Pakistani banking channel for financing. It is estimated that Pakistan loses $10 billion p.a. in trade related money laundering through over/under invoicing. A large share of this discrepancy can be explained by the surge in import of power generation machinery, which is being recorded by customs but is not fully visible in import financing data available with SBP.

Since most of the power sector activity in the country is taking place under the CPEC umbrella, it is highly probable that the widening gap between the two imports data sets is linked with the CPEC accord signed in April 2014. Typically, banks report import financing data to SBP after importers make payments against L/Cs. However, that appears not to be the case with imports of power generation machinery over the past two and a half years: there has been a relatively minor increase in these imports based on L/C-level data provided by commercial banks to SBP.

This is also supported by the absence of any outsized pressure in the interbank (which would have been a near certainty if the import bill had grown by a further $3.0 billion in Jul-Dec FY17, as per PBS data, without a commensurate increase in financing flows). This difference indicates that capital equipment imports into the country, Foreign Direct Investment (FDI) and loans from China are not being fully captured in the balance of payment (BoP) data.

SBP claims it has enhanced reporting requirements for commercial banks regarding foreign currency accounts maintained with them by corporate entities operating in the country. SBP has directed commercial banks to clearly specify whether each project/company maintaining a special Foreign Currency Account (FCY) account with them, is part of the CPEC or not. Moreover, banks have also been instructed to clearly specify the nature of each foreign exchange (FX) transaction conducted in these accounts (like import payments, loan disbursements and repayments, repatriation of dividends, disinvestment of foreign investment, and issuance of bonus shares, etc.). This will help clarify whether the financing of CPEC-related capital imports is coming in the form of loans, and equity investment.

Pakistani banks are ignored for import or export of machinery when a firm makes a business deal with a foreign company while using its same company registered in the other country. According to reliable sources, the machineries were now largely being imported by either Chinese firms, registered both in China and Pakistan, or any Pakistani company having registration in Dubai to avoid the duty and taxes. Hence, the country ultimately was losing huge revenue in terms of taxes and duties.

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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