Debt roll overs
At 62.1 per cent of gross domestic product, the overall debt is poised to breach the ceiling fixed by the Fiscal Responsibility and Debt Limitation Act at 60 per cent of GDP, by June 2013. But more than that, the financing needs for growing debt obligations and fiscal deficit would go beyond 30.2 per cent of GDP this year.
With uncertainties over three major areas – expected shortfalls in revenue, non-materialistion of third generation telecom licences auction and uncontrollable power sector losses – the international financial institutions have projected overall fiscal deficit at the end of this year at 6.4 per cent of GDP, much higher than 4.7 per cent assumed in the budget books.
The Federal Board of Revenue (FBR) has indicated that the revenue target will be missed by a margin of almost Rs200 billion unless income and asset whitening schemes are introduced. As in the last four years, the power sector losses/subsidies remain unquantifiable and way ahead of budgetary projections. In the first four months, the power subsidies have crossed the annual target.
On the back of recent security and tax- related interventions in the telecom sector, and the continued dilly-dallying by relevant ministries and regulators in pushing forward the auction of third generation licences has made it clear that the transaction to yield around $800 million to $1 billion is unlikely to materialise during an election cycle. The transaction has been delayed for more than three years because of vested interests.
With no progress on the disbursement of $800 million outstanding dues from Etisalat on account of much delayed PTCL privatisation proceeds, and no expectation of any major foreign inflows for budgetary support, the financing needs to meet budget deficit would depend heavily on domestic short- term borrowings. Already, the government is caught in a vicious cycle of rolling over of short- term domestic loans on a quarterly basis.
On top of that, the major concern is that balance of payments will emerge as a serious crisis at a crucial stage in March or latest by June next year—a period of political transition and with practically no one in-command or position to take long-term view of the country’s needs and obligations.
With the State Bank of Pakistan’s foreign exchange reserves at around $9 billion (and another about $4.5 billion with commercial banks), the exchange rate has come under pressure. As currency dealers and media feed each other into panic currency trading, the central bank has limited resources to inject dollars in the market to stabilise exchange rate.
Economic managers, however, feel comfortable. “Luck is on our side but the country’s challenges remain”, said an economic manager who believed that the government had reasonable reserves and comfortable current account ,at least for the time being, to sail through the remaining three months until March 16 without a major crisis. “Political and economic transition will take place simultaneously”, he said, adding that the interim and subsequent political governments would have to deal with major economic crisis as the present government had to deal with the situation inherited in 2008.
There seems to be no option but to approach the IMF again for another programme but the Fund has already indicated that it would prefer to discuss future course of reform programme with the elected political government that would have at least medium-term ownership for structural corrections.
With Pakistan’s IMF quota estimated at about one billion statutory drawing rights (SDRs) (about $3 billion), the coming government would have the option for seeking about $3 billion financing from the Fund, to be dovetailed with assistance from other lenders for development projects, debt servicing and deficit financing.
For the current year, the IMF has estimated Pakistan’s gross debt financing needs at about 24 per cent and deficit financing at 6.4 per cent.
The Fund has already given up taking seriously the government’s fiscal deficit estimates announced in the budgets that have repeatedly been missed by wide margins.
The IMF is focusing on ‘structural fiscal deficits’ because projections for power subsidies, revenue slippages, losses in commodity operations, consolidation of previously unfunded debts and foreign inflows were taken as ‘one-off’’ deficits outside normal budgetary deficit almost on a regular basis. Therefore, the IMF projects total revenue projections at 12.8 per cent of GDP against 19.2 per cent annual expenditures, to reach at a structural deficit of six and half percent.
The government borrowings increased the total gross debt to 62.4 per cent of GDP in 2012 from 60.2 per cent a year ago and net debt-gross debt, excluding foreign exchange reserves to 59.1 per cent of GDP this fiscal from 56.9 per cent in the previous year. Unless the government improves the primary balance by enhancing revenues and rationalising expenditure, it would be difficult to create reasonable fiscal space to honour debt obligations with dignity.
The IMF projections suggest that Pakistan’s cyclically adjusted primary balance would register a surplus of 2.9 per cent in 2020-30 which means that the country would continue to borrow to retire its debt until then. For the current year, Pakistan would roughly need Rs1.5 trillion to finance the fiscal deficit and Rs5.6 trillion to service maturing debt that also includes $2.8 billion repayment to the Fund.
The enormous short-term borrowing and security expenditure currently constitutes about 85 per cent of the current expenditure and 68 per cent of the total expenditure. This is unsustainable, alarming and raises a question mark over the ability of the economic managers to develop a secondary debt market, raise tax- to- GDP ratio, and create an environment for domestic and foreign investment.
It is in this background that the IMF executive board, in its latest evaluation, has called into question the performance of the sitting government and its economic managers. “Deep seated structural problems and weak macroeconomic policies have continued to sap the country’s vigour” that would continue to grow at a dismal rate of slightly over three per cent as it did in the last four years, unable to improve living standards and absorb the increasing workforce.
The IMF estimated the unemployment rate last year at 7.7 per cent and projected it to grow to 8.4 per cent this year. It has estimated official foreign exchange reserves falling from $10.8 billion to $7.4 billion at the end of current fiscal year.
The IMF directors noted that “Pakistan continues to face difficult macroeconomic challenges as growth remains insufficient, underlying inflation is high, and the external position is weakening. The situation is compounded by an uncertain global environment and a difficult domestic situation, as well as adverse effects of natural disasters. The board advocated “strong policy measures and deeper reforms to
address vulnerabilities, boosting sustainable growth, and reducing poverty”.