Debt-To-GDP ratio to hit 15-year high in Pakistan
Pakistan’s public debt in terms of total size of the economy is estimated to jump to a 15-year high of 70.1% by the end of PML-N government’s tenure, exposing the country to many risks and giving less room for human development spending.
The Ministry of Finance finally acknowledged before the federal cabinet on Tuesday that the public debt-to-gross domestic product (GDP) ratio was estimated to peak at 70.1% by the end of fiscal year 2017-18 in June.
The high ratio violates the Fiscal Responsibility and Debt Limitation (FRDL) Act of 2005.
Finance Secretary Arif Ahmad Khan gave a briefing on broader contours of the economy and the budget including the debt situation. In absolute terms, the public debt, which is a direct obligation of the finance ministry, will be Rs24 trillion by the end of June 2018.
The 70.1% debt-to-GDP ratio was 10.1 percentage points higher than the limit set by parliament and 20 percentage points higher than sustainable levels for developing countries like Pakistan.
This is the result of an expansionary fiscal policy, narrow tax base, failure to enhance exports and attract adequate foreign direct investment. Even Prime Minister Shahid Khaqan Abbasi had to say in the cabinet meeting that loans were not an alternative to sustained revenue and income streams.
However, borrowing has remained the most preferred choice for the PML-N during its five-year tenure that is ending in around one and a half month.
The 70.1% ratio was 8.7 percentage points or roughly Rs2.9-trillion higher than the level that former finance minister Ishaq Dar had vowed to achieve by June 2018. While presenting his last budget, Dar had committed to lowering the debt ratio to 61.4% by June 2018.
The 70.1% ratio had been the highest since fiscal year 2003-04 when it stood at 69.7%. Since then, the ratio had been on the wane, but it started increasing again in 2008-09. When the PML-N government came to power in 2013, the debt-to-GDP ratio was 64%, according to a central bank report.
In response to the worsening debt situation, a comprehensive debt burden reduction and management strategy was designed in 2001 with a view to bringing it within sustainable limits. This strategy, together with favourable macroeconomic developments, became effective in reducing the debt burden to below 60% of GDP during the tenure of General Pervez Musharraf.
Pakistan also got a major respite in 2002 when the Paris Club rescheduled the country’s external debt of $12.5 billion in return for becoming a frontline state in the war on terrorism.
Dar had twice amended the FRDL Act of 2005 to change goalposts after the debt kept on piling.
During the cabinet meeting, Special Assistant to Prime Minister on Revenue Haroon Akhtar Khan said deterioration of the debt situation had spoiled the government’s good story about the economy, cabinet sources told.
Owing to the growing debt burden, in the next fiscal year the federal government will spend Rs1.607 trillion or 30.7% of its budget on debt servicing, which will provide little room for development spending.
Under the amended FRDL Act, the public debt-to-GDP ratio had to be brought down to 60% by the end of fiscal year 2017-18. The 70.1% ratio violated the law.
There were three key reasons for the high ratio which included about 10% depreciation of the rupee against the US dollar, higher-than-projected budget deficit and increasing cost of debt servicing, according to sources in the finance ministry.
Parliament had approved a budget deficit target of Rs1.479 trillion or 4.1% of GDP for the current fiscal year. But the finance ministry told the cabinet on Tuesday that the deficit would increase to Rs1.9 trillion or 5.5% of GDP.
Defence, debt to eat up half of proposed rs5.237 trillion budget for FY2019
The federal cabinet has approved an expansionary fiscal policy that offers little for development but gives away more than half of the estimated budget of Rs5.237 trillion for new fiscal year to meet the growing needs of defence as well as debt servicing.The cabinet on Tuesday approved Rs1.1 trillion for regular defence budget and another Rs100 billion for Armed Forces Development Programme (AFDP) – a sum of Rs1.2 trillion that is equal to 23% of the proposed total budget of Rs5.237 trillion.
Another amount of Rs1.607 trillion or 30.7% of the proposed budget has been earmarked for debt serving. The original debt servicing cost in the outgoing fiscal year was Rs1.364 trillion which has now jacked by Rs243 billion or 17.8% for the next year.
“The defence and debt serving would consume 53.7% or Rs2.8 trillion out of Rs5.237 trillion,” a cabinet minister told. The Rs5.237 trillion overall size of the budget is 10% or Rs484 billion higher than the previous year’s original budget approved by parliament in June last year.
In a special meeting, the cabinet approved the Budget Strategy Paper for fiscal year 2018-19, authorising a record budget deficit of Rs2.029 trillion that will be equal to 5.3% of the GDP. The government will borrow Rs2.029 trillion from domestic and external sources to bridge the budget deficit gap.
“The sustained income and revenue streams will benefit the country instead of obtaining loans,” said Prime Minister Shahid Khaqan Abbasi while chairing the meeting.
The record borrowings have remained a hallmark of the Pakistan Muslim League-Nawaz (PML-N) government during the past five years. The cabinet approved Rs4.435 trillion tax collection target for the Federal Board of Revenue (FBR).
The PM decided to increase the federal development budget to Rs800 billion against the finance ministry’s proposal of Rs750 billion for the next year.
FDI falls to $153 mn ahead of elections
Foreign direct investment in Pakistan slowed down in March, amounting to just $152.7 million compared with $318.3 million in the same month of the previous year.
The drop comes apparently due to a pickup in political noise ahead of the general elections to be held later this year.
The State Bank of Pakistan (SBP) reported on Tuesday that Foreign Direct Investment (FDI) has halved to $152.7 million in March compared with $318.3 million in the same month last year.
Cumulatively, in the first nine months (July 2017 to March 2018) of the current fiscal year, FDI improved 4.4% to $2.09 billion from $2 billion in the same period last year, the central bank added. The latest monthly investment is the lowest in any of the previous seven months or after August 2017’s FDI of $152.5 million, according to the central bank.
On the other hand, Pakistan’s economy continued to expand. Gross Domestic Product (GDP) grew at the decade high level of 5.8% in fiscal year 2018, in progress, compared to last year’s decade high of 5.3%.
Furniture industry has potential to contribute billions
Pakistan’s furniture industry has the potential to dominate global markets with its innovative designs, and can make contributions to exports if properly patronised, said former Punjab governor Chaudhry Muhammad Sarwar.
Speaking at a meeting with Pakistan Furniture Council (PFC) Chairman Mian Kashif Ashfaq, he urged the government to establish greater liaison with the sector to understand market conditions and requirements of the industry to protect, develop and promote.
Bhasha dam gets go-ahead at last
Pakistan on Tuesday gave a final go-ahead to the construction of Diamer-Bhasha dam at an estimated cost of Rs474 billion aimed at increasing the country’s depleting water storage capacity.
Headed by Prime Minister Shahid Khaqan Abbasi, the Executive Committee of the National Economic Council (Ecnec) approved five mega projects at the total cost of Rs504 billion.
The Central Development Working Party (CDWP) had cleared the Diamer-Bhasha dam at a cost of Rs625 billion. Subsequently, the planning ministry excluded the land component and construction of a colony from the dam cost, bringing the price tag down to Rs474 billion.
The dam will have a 6.4 million acres feet live storage capacity and an installed power capacity of 4,500 megawatt, according to an announcement by the Prime Minister Office.
However, the power house component will be approved separately and the Rs474 billion cost is meant for building the reservoir.
On completion, the project will increase national water storage capacity from 38 days to 45 days and enhance life span on downstream reservoirs, including the Tarbela Dam, said the PM Office.
The project will also increase the Dasu hydropower project efficiency by 28%, according to a planning ministry official.
The Water and Power Development Authority (Wapda) informed the prime minister that land issues have to be sorted out before starting the construction of the dam, according to the officials.
Successive governments have given Rs138 billion for land acquisition and resettlement. Most of this work has already been done and the government has spent Rs58.3 billion on land acquisition. An amount of Rs53.5 billion has additionally been approved for resettlement.
In the past 17 years, almost every head of the state and the government has performed the groundbreaking ceremony of the project but civil work could not begin due to lack of financial resources.
Economic coordination committee puts off decision on higher LNG import margins
The Economic Coordination Committee (ECC) of the cabinet has deferred decision on tax exemptions worth billions of rupees and increase in margins on liquefied natural gas (LNG) imports following opposition from the Finance Division which fears it will not be able to meet revenue target.
Pakistan State Oil (PSO) and Pakistan LNG Limited are importing around 1 billion cubic feet of LNG per day and any hike in their margins will push up gas prices and put burden on the consumers. Power, textile, other industries and compressed natural gas (CNG) filling stations are major consumers of the imported gas.
The Ministry of Energy (Petroleum Division) had sought an increase in margins on LNG imports after the Federal Board of Revenue (FBR) refused to withdraw 1% withholding tax. In a meeting of the ECC on Tuesday, the Petroleum Division argued that 1% withholding tax was levied on the value of LNG cargoes at the import stage, which the FBR treated as non-refundable.
It translated into an effective tax rate of around 71% of the margins allowed by the Oil and Gas Regulatory Authority to PSO, which would lead LNG importers towards financial collapse, the Petroleum Division said.
It proposed that margins of importers should be jacked up by 1.32 percentage points from 2.5% to 3.82%.
In that regard, the Ministry of Energy (Petroleum Division) presented a summary before the ECC, seeking tax exemption and a uniform tax rate for LNG imports to avoid the hassle of tax refund.
After discussions, the ECC gave directives for further consultation on the tax exemption issue following resistance from the Finance Division.
A senior government official told that the Petroleum Division sought exemption from 3% minimum value addition tax on LNG imports and reduction in input and output sales tax on gas imports and onward supply of re-gasified LNG to Sui Northern Gas Pipelines (SNGPL) from 17% to 12%.
It was informed during the meeting that SNGPL – a state-owned gas transmission and distribution company – was paying 17% general sales tax to PSO and was receiving nothing in sales tax from the textile sector and only 5% from CNG stations.
Owing to this anomaly, Rs7.97 billion of SNGPL had been stuck and it was facing cash flow problems.
Govt to purchase power from sugar mills at high tariff
The National Electric Power Regulatory Authority (Nepra) has turned down a plea of the federal government, which will be bound to purchase electricity from sugar mills at higher rates despite production of cheaper power by plants based on liquefied natural gas (LNG), coal and other resources.
After Nepra’s decision, 12 influential sugar mill owners will receive additional earnings of Rs48 billion through the production and sale of bagasse-based electricity over the next 10 years.
Nepra set an old tariff for the bagasse-based power plants with 390-megawatt generation capacity at Rs12.09 per unit despite determining a new tariff. The new tariff has been set at Rs8.86 per unit, which does not apply in this case.
Nepra’s decision came in response to a review petition filed by the Central Power Purchasing Agency (CPPA), on behalf of the federal government, that challenged the higher old tariff and requested the application of fresh tariff in order to provide relief for the consumers.
However, Nepra dismissed the review petition on Wednesday, saying the motion was devoid of merit.
In its petition, the CPPA had pointed out that prior to the expiry of the upfront tariff of 2013, Nepra had initiated the process of determining the upfront tariff for 2017, which was set at a lower level than that for 2013.
The CPPA pleaded that the permission for collecting the higher tariff should be set aside. It pointed out that the current portfolio of CPPA-Guarantee commitments under the prevailing Power Policy Generation 2015 covered re-gasified LNG power plants, imported coal-based power plants and local mine-mouth coal power plants.
Hence, purchase from bagasse co-generation power projects on priority would lead to displacement of supplies from the cheap and efficient conventional sources of energy generation, which would impact the basket prices.