Still on redline
Despite The austerity drive, release of refund and subsidy to the exporters and preferential electricity and gas tariffs to export industries, the macro economic indicators have not shown signs towards imprudent. The federal governments’ reliance to remain afloat has increased massively as borrowings from the State Bank of Pakistan surged to the highest ever Rs. 5.4 trillion by the end of September, an increase of Rs. 1.8 trillion or 48 percent just in three months. This will be the main concern for Pakistan Tehrik-i-Insaf government because the International Monetary Fund would like to see a drastic reduction in debt stock of the central bank in case both sides agree on a bailout programme.
The unchecked lending by the State Bank Shows that it remains subservient to Finance Ministry and has lost the autonomy which was given to it by Musharraf government. The bull of acquiring excessive borrowing let loose by the previous PML-N government is still doing rounds to make the public debt unsustainable. Almost half of the addition to borrowing from central bank was because of retirement of commercial bank loans. The commercial banks are reluctant to invest in long term government securities in anticipation increase in interest rates.
The ballooning of public debt was caused by the previous governments’ inability to attract non-debt creating inflows and enhance tax revenue. Same is the case with the incumbent government. The Public Debt Management Report of June 2018 showed that most of the indicators moved further towards dangerous levels while three breached the redlines, set in the medium term debt strategy. The PTI government has not changed the course of fiscal policy and it is largely implementing the policies that were followed by the PML-N government, although the finance minister Asad Umar gave a critique of those policies in his press conference about the situation of economy on Friday.
The Monetary and Fiscal Coordination Board has expressed concern on Thursday over weakening fiscal position and rising federal government borrowing from the central bank highlighting two issues that require urgent action. The fiscal deficit being 1.4 percent or Rs. 5.41 trillion was the highest in the past seven years. Low revenue collection remains the root cause behind the budget deficit after Federal Bureau of Revenue (FBR) missed its target of first quarter tax collection by huge margin. The FBR has identified 20000 non-filers but its past dismal performance of expanding the tax net with incomplete addresses of tax dodgers has not yielded positive results.
The Finance Minister, while chairing the Fiscal and Moneta Board meeting said that the government was committed to improving with the fundamentals of economy and achieving sustainable balanced economic which is a remote possibility in the given economic situation in foreseeable future. He stressed the need to study the decline in the production of large scale manufacturing that contracted by 1.7 percent in the first quarter of the current fiscal year. He emphasised that appropriate measures should be taken to address the issues and directed the Finance Division to earnestly complete integrated policy paper focusing on economic strategy in the medium term.
The board meeting took place a day before the Monetary Coordination policy meeting, which is anticipated to raise the interest rate by 1 percent to 9.5 percent due to shrinking gap between core inflation and interest rate. The headline inflation is increasing on the back of non-food inflation above 8 percent whereas food inflation is rising moderately by 2.7 percent on account of smooth supply of commodities in the market and better price monitoring system. The meeting also discussed the export credit facility offered by Saudi Arabia envisaging the purchase of crude oil up to $ 3.2 billion per annum on 12 months deferred payments. The oil prices are on the decline and government has also slashed the price of petrol and diesel by 2 rupees per litre.
Because of dismal performance of the FBR in tax collection, particularly the Inland Revenue Services, the federal cabinet decided, in principle, to separate tax policy formulation from tax administration amid half hearted support from the FBR that did not want to abolish its policy wing even after its transfer to the Finance Division. The subject of tax policy will be transferred to the finance division, subject to fulfillment of all legal obligations. Eventually the policy wing of FBR will be transferred to the Finance Division.
Balance of payment crisis seems to be far from over as foreign currency reserves are negative $4 billion after excluding the IMF debt obligations, suggest the latest figures released by SBP. Rupee has nosedived to 7.5 percent to record low at Rs 144 in the interbank trading. But the Finance Minister said that Pakistan can wait for two more months before deciding on an IMF programme. However, he admitted that the programme will ease and open up other funding avenues. He said the government is looking for bilateral assistance from friendly countries to help plug a $ 12 billion hole in the external account. The worsening macroeconomic imbalances need immediate corrective measures.