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Govt concedes serious violation of fiscal debt law

Updated February 02, 2019

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Finance Minister Asad Umar speaks before parliament. — File photo
Finance Minister Asad Umar speaks before parliament. — File photo

ISLAMABAD: Reporting total external debt and liabilities at $96.7 billion at end-September 2018, the government has conceded serious violations of the Fiscal Responsibility & Debt Limitation Act (FDRLA) on both fiscal and external fronts.

In its debt and fiscal policy statements for 2018-19 released on Friday, the Ministry of Finance said the total external debt and liabilities increased by about $1.4bn to $96.735 at the end of September 2018 from $95.342bn. It said the total external debt and liabilities posted a big increase of $11.86bn during the full year 2017-18 from $83.48bn at the end of fiscal year 2016-17.

The statements put the country’s total debt and liabilities at Rs30.875 trillion at the end-September 2018 from Rs29.89tr at end-June 2018. It said the total debt and liabilities had increased by about Rs4.7tr to Rs29.89tr during 2017-18 from about Rs25.11tr at the end of fiscal 2016-17.

The statement said the FDRLA 2005 required the government to reduce total public debt and maintain it within prudent limits thereof. It required limiting of federal fiscal deficit excluding foreign grants to 4pc of GDP during the three years, beginning from the financial year 2017-18 and maintaining it at a maximum of 3.5pc of GDP thereafter.

Total external debt, liabilities soar to $96.7bn

The government could not honour this requirement as federal fiscal deficit (excluding grants) was recorded at Rs2.243tr or 6.5pc of GDP during 2017-18, thus, remained higher than the threshold of 4pc. Also, the total debt servicing was recorded at Rs1.893tr while the interest servicing was Rs1.348tr.

The law also required ensuring that within a period of two financial years, beginning from 2016-17, the total public debt shall be reduced to 60pc of the estimated GDP. However, the “total public debt and total debt of the government as percentage of GDP stood at 72.5pc and 67pc respectively at end June 2018, thus, remained higher than the 60pc-threshold”.

Another clause required ensuring that within a period of five financial years, beginning from 2018-19 total public debt shall be reduced by 0.5pc every year and from 2023-24 and going up to 2032-33 a reduction of 0.75pc every year to reduce the total public debt to 50pc of GDP and thereafter maintaining it to 50pc or less of GDP.

The debt reduction path in terms of GDP has been envisaged after 2017-18 to reduce the public debt to GDP ratio to 50pc by 2032-33 and thereafter maintaining it at or below that level.

The law also barred the government not to issue new guarantees, including those for rupee lending, bonds, rates of return, output purchase agreements and all other claims and commitments that may be prescribed, from time to time, for any amount exceeding 2pc of GDP in any financial year provided that the renewal of existing guarantees shall be considered as issuing a new guarantee.

This clause was also violated as the government issued new guarantees including rollovers amounted to Rs324bn or 0.94pc of GDP in 2017-18.

The Ministry of Finance explained that during 2017-18, external debt and liabilities recorded an increase of $11.9bn to $95.3bn by end June 2018. Out of this total increase, external public debt contributed $7.7bn and stood at $70.2bn at end June 2018.

The increase in external debt and liabilities was mainly on account of burgeoning current account deficit which led to a considerable increase in external financing requirements during 2017-18.

In addition, revaluation losses on account of US dollar depreciation against international currencies also contributed towards the increase in external public debt during 2017-18, the statement said.

The statement said the government was now giving priority to revenue mobilisation and rationalisation of current expenditure to bolster macroeconomic stability. It said the performance of many public sector entities had deteriorated over past many years but the government had taken an initiative to set up “Sarmaya-e-Pakistan Holding Ltd (SPHL)” to revive loss-making public sector enterprises.

The most critical aspect and objective of SPHL is to get these entities out of the administrative control of various ministries and put them under professional management with requisite sectoral expertise. Further, the government is introducing policies to ease methods of revenue collection such as digitisation of tax collection.

Published in Dawn, February 2nd, 2019