Massive deficit financing

National Assembly has been told that government intends to go for additional borrowing of Rs.1.9 trillion to finance fiscal deficit during the remaining two quarters of the current fiscal year. A week ago, the house was told that incumbent government has done deficit financing of Rs.11.6 trillion during the first15 months of its tenure of government. This heavy borrowing was in gross violation of Fiscal Responsibility and Debt Limitation Act, 2005.

Obtaining of additional loans will push up the total public debt to Rs.43.7 trillion, equal to 80 percent of the gross domestic product whereas debt limitation law on the statute book envisages a safe public debt limit of 60 percent of the national output. It is worth mentioning that the World Bank had advised the preceding government to maintain strict fiscal discipline by removing the lacunae in the Fiscal Responsibility and Debt Limitation Act and had pegged a soft loan of $400 million for carrying out necessary fiscal reforms but to no avail. Hence the legacy of Rs.29.9 trillion public debt equal to the 74 percent of gross domestic product.

The reckless borrowing of the last PML-N government had been vehemently criticised by none else but by the Prime Minister Imran Khan himself. However, PTI government turned out to be more reckless in further swelling public debt. In the preceding government, the tool of deficit financing was used for paying the inflated import bill and reducing the circular debt. In the present government the current account deficit has declined by 75 percent due to import compression till December last year, then what is the rationale of excessive borrowing when civil expenditure remained restricted to Rs.183 billion during the first half of the current fiscal year. The issue of fast rising public debt was agitated by a PML-N member of National Assembly to which a convincing answer must come from the Advisor on Finance in express language for the understanding of the people and not in vague verbosity of generic nature. It is not suffice that members of National Assembly have been told in written statement that government has acquired Rs.71 billion loans against Peshawar-Islamabad Motorway and $2 billion against two portions of Islamabad-Lahore Motorway. It explains the doubling of Motorway toll tax. This reminds of default situation that  Greece faced three years ago, compelling this European Union Member country to mortgage almost all national assets including railroad infrastructure, postal services, seaport, water supply system in addition to slashing pay and pensions of the in-service government employees and retirees. Does the present government is pushing the country to that stage?

The reasons for the mounting fiscal deficit are that although tax revenue has increased by 17 percent yet the gap between revenue and expenditure is widening. Debt servicing of previous loans, payments for clearing power sector circular debt and keeping afloat huge losses incurring state enterprises accounts for the ballooning public debt. The IMF recipe of fiscal and monetary measures have de-accelerated the wheel of the economy as reflected in the tax revenue short fall and decline in exports during the months of December and January. Current account deficit is again rising. In January, exports fell by $61 million to $1.973 which indicated that modest growth of 5 percent in exports cannot be sustained during the remaining five months of the current fiscal year. Business leaders have attributed the phenomenon of falling exports to the government decision of withdrawing subsidy in electricity tariff from the export industries and double digit inflation which have wiped out the comparative advantage of value added export products. IMF has been requested to not press hard for further electricity tariff increases. This amounts to trimming of branches of tree that has slammed the door on the growth of economy instead of rooting out the tree. The primary drivers of piling circular debt are open-ended power purchase agreements with IPPs and default of electricity bills by running and new defaulters. It is beyond comprehension as to why the present government is reluctant to take bold decision for sweeping the mines laid in the economy by previous governments which will help curtail the public expenditure of non-productive nature.