IT was a strange newspaper on Wednesday, at least the business pages. Here was the State Bank, warning that growth can slip to as low as four per cent this year, that the fiscal situation was worsening, that expenditure growth was driven by current expenditures like defence and debt servicing, presenting no options for further cuts so no alternative was present other than massive revenue-generation measures.
Next to that was the chief economist of the Department for International Development, the UK government’s aid arm and Pakistan’s largest aid donor for many years, saying that the government needs to “take tough decisions”. She didn’t spell out what these were, but a hint may have been provided in the third story just next to this one.
“Board hints at further fiscal tightening” announced a staid headline. The board in question is the monetary and fiscal policy coordination board, whose task is to liaise between the government and the State Bank. The board has a bland title, and the language in which it speaks is equally flat. But a somewhat extraordinary press release came following the meeting.
“The ongoing adjustment plan for fiscal consolidation was presented to the Board” the release said. What ‘fiscal consolidation’ one might ask? In the last mini budget, the government doled out tax breaks to billionaires that left the fiscal balance something like Rs7bn poorer. After that, the finance minister held an aggressive press conference saying there will be no further tax measures till the end of the fiscal year. So what “on-going adjustment plan for fiscal consolidation” did they actually discuss?
How did expenditure growth stay the same even though the government undertook a sharp reduction in development expenditure in its September mini budget?
“[T]he Board observed that there is further scope for tightening of the fiscal stance” the release went on. Now we get a clue. Did the nongovernment members of the board impress upon their colleagues the importance of addressing the deficit? All the billions pouring in from our ‘friends’ will count for nothing if that doesn’t happen.
“The meeting observed that fiscal consolidation is a key element of the adjustment plan, and necessary for ensuing macroeconomic stability” the release continues. Apparently somebody in the room was trying to highlight the fiscal situation, and the authors of the release wanted us to know this, but what exactly was observed about the on-going fiscal consolidation was not said.
For a clue on what that might be, take a look at the first quarterly report released by the State Bank on the same day. The chapter on fiscal development opens by pointing out that the first quarter deficit touched 1.4 per cent, higher by 0.2pc from the first quarter last year. So far so good, this has already been reported amply. But then, it takes a closer look at where the fiscal framework is going out of sync.
The report says that “overall expenditure growth remained unchanged despite a sizeable cut in development spending, it was the marked slowdown in revenue growth that increased the fiscal gap.”
So how did expenditure growth stay the same even though the government undertook a sharp reduction in development expenditure in its September mini budget? One answer is in the debt servicing that grew by 13.9pc in the first quarter, which is explained by rising interest rates, higher public borrowing, as well as the currency devaluation. Last year, debt servicing grew by 7.5pc in the first quarter, so this year’s growth is indeed appreciable.
But then come a few surprises. “Other current expenditures of both the federal (especially defence-related) and the provincial governments also grew sharply,” says the report. So at a time when there were sharp expenditure cuts being taken by the government, “defence-related” expenditures “grew sharply”, according to the State Bank, though they add that provincial governments were also spending more.
A little further down appears a table that gives a little more detail. Defence spending increased by 20.6pc in the first quarter, where its growth in the first quarter last fiscal year was 20.1pc, so the trend was maintained. Interest payments nearly doubled their growth for reasons already stated. But the growth rate of current spending by the provincial governments actually fell, from 25.9pc growth in first quarter previous fiscal year, they grew by 22pc this year. Overall current spending grew by 19.3pc while development spending was slashed by 42.5pc in the quarter.
It’s not difficult to see where this story is going. One by one all parties that are looking at Pakistan finances are lining up behind the same refrain: the fiscal framework needs to be strengthened. Key to doing this is revenue mobilisation and cuts in current spending. And thus far the government is shying away from these ‘tough decisions’.
At the moment, the State Bank points out, the government is borrowing to make its interest payments. This is called a negative primary balance in the parlance of economists. And a potential vicious circle looms. The more this primary balance persists, the more the burden of debt increases. The more the debt increases, the more the currency has to be debased and interest rates raised. The more the currency is debased, the greater the external sector pressures climb. The more those pressures climb, the greater the erosion of the foreign exchange reserves.
The billion-dollar bailouts that have been rolling in ever since the Taliban talks got under way in earnest back in October will not pull the economy out of this vicious circle. They will simply keep the country afloat, head above water, for a while.
So what exactly made the business pages strange on Tuesday, when all this was reported? Because there, in the middle of all these headlines, stood our commerce minister, proudly telling us that the country’s trade deficit will shrink by $5-6bn by June, that the trade numbers are looking good, that January will see more improvement.
Now if only someone could ask him to comment on the fiscal side of the equation too, we would have a fuller picture. Until then, the numbers are not shining as brightly as we are told.
The writer is a member of staff.
Published in Dawn, January 31st, 2019