Is financial crisis emerging?
The downturn of the economy accelerated by the Previous PML-N government now seems to be heading towards financial crisis. The budget deficit has hit a new high of Rs. 2.4 trillion, compelling the finance ministry to instruct the Central Bank and Accountant General Pakistan Revenues (AGPR) to block the clearance of government cheques on June 30 to avoid further embarrassment. The cheques that were issued on June 29 and were not cleared by 30th June will become invalid for the transfer of money to the accounts of clients in the scheduled banks.
The finance ministry conveyed verbal instructions to the State Bank of Pakistan (SBP) and National Bank of Pakistan (NBP) not to honour government cheques on June 30, which was the last day of fiscal year 2017-18. The Central Bank then conveyed the instructions to banking institutions. The finance ministry also conveyed to AGPR to stop issuing cheques on the last day of the fiscal year. Normally, the government cheques issued on 29th and 300h June are cleared till late in night of by SBP. In 2012, the SPB had given three days grace period until July 3, for clearance of cheques issued by AGPR, Provincial Accountant General Offices and their District Account Offices.
Oblivious of the financial situation of the country that was left as legacy to the caretaker government by the previous government; the planning ministry has protested against the decision of the finance ministry and has raised the issue of constitutionality of the move. In its memorandum the planning ministry contended that this would be amounting to non-compliance of constitutional provisions relating to annual budget and its operation.
The ministry of finance took these inevitable steps to stop payments from the treasury accounts, as budget deficit was going through the roof. Its initial assessment showed that budget deficit for fiscal year 2017-18 could widen to as much 7.1 percent of the Gross Domestic Product, excluding power sector circular debt which is Rs. 900 billion plus. The main reason behind the ballooning budget deficit were over spending by the governments of Punjab and Sindh, lack of control by the federal finance ministry and massive shortfall in FBR tax revenues.
The Punjab government took an overdraft of Rs. 59 billion and Sindh Rs. 10 billion. These measures led to no saving by the provinces. The federal government also opened its purse during the last few months doling out the so called development funds to the law makers of ruling PML-N and excessive discretionary spending. The remote controlled finance ministry by the absconder former finance minster Ishaq Dar closed its eyes to 2018 election related slippages against which the International Monetary Fund had forewarned.
Another shock came from the FBR that failed to even achieve its downward revised tax collection target of Rs. 3.935 trillion despite availing the benefit of tax amnesty scheme. Till Saturday, the FBR tax collection was less than 3.77 trillion against its original target of Rs.4.013 trillion. The shortfall in tax collection would add at least 0.6 percent to the budget deficit. The poor show require a thorough reshuffle in FBR and probe as to whether it was the result of inefficiency of tax collectors or their arm twisting by the ruling political elite.
The non-clearance of government cheques by NBP and the banking system will lead to lapses of billions of rupees funds allocated for FY 18. Affectees include federal government ministries, contractors working on public sector projects and provincial governments. The grim scenario was not unexpected. The World Bank in its report, “South Asia Focus Fall 2017” cautioned the government of Pakistan in August last year against the fiscal imbalances including ballooning budget deficit and bulging current account deficit and suggested certain corrective measures. But that report was rejected outright by singing the mantra of economic gains and prosperity that CPEC has brought. It was a ploy to hoodwink public opinion. Pakistan would urgently need another IMF bailout package as opined by a renounced economist who had served in the finance ministry.