No compromise on fiscal discipline

Updated June 10, 2019

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FY20 is going to be tough, perhaps tougher than FY19 in terms of resource gaps in the government’s finance books. — Creative commons
FY20 is going to be tough, perhaps tougher than FY19 in terms of resource gaps in the government’s finance books. — Creative commons

Pakistan’s armed forces have volunteered not to seek an increase in defence budget in the next fiscal year, starting July 1. PM Imran Khan has appreciated it.

FY20 is going to be tough, perhaps tougher than FY19 in terms of resource gaps in the government’s finance books. The army’s offer, therefore, must be a big relief for the finance team.

Media reports suggest that the PTI government will also keep the development budget in FY20 unchanged at this year’s level. The nation can expect some real financial belt-tightening —also because over the years revenues have failed to meet huge expenses. And for years, the gap has been bridged with external and domestic debt. The government’s domestic debt and liabilities have increased by Rs2.1 trillion within a year, taking the total stock to Rs18.609tr in March 2019 from Rs16.502tr in March 2018. During this period, external debt and liabilities of the public sector also shot up to $87.92bn from $76.06bn, according to SBP statistics.

So, it’s no brainer to figure out where the biggest chunk of the projected revenues for FY20 will be used? Well, as usual on debt servicing. In nine months of FY19, domestic debt servicing alone consumed Rs1.277tr, equal to 23.3 per cent of the overall expenses whereas on defence the nation spent Rs774.7bn or 14.1pc of total expenses. Full FY19 domestic and external debt servicing is being projected at Rs2.04trn.

Has something happened during this fiscal year that added to the cost of debt servicing? Of course, yes.

When the largest chunk of a country’s annual spending goes to debt servicing for years, there is something wrong with its fiscal management

So far during this fiscal year, the rupee has lost 22.3pc value falling in the interbank market to 148.60 to a US dollar on June 3 from 121.50 at the end of last fiscal year. And, the State Bank of Pakistan has raised its key policy rate, in phases, by 5.75pc to 12.25pc now, pushing the interest rates on treasury bills and bonds accordingly.

Due to a weaker rupee we’ll have to set aside 22.3pc more rupee resources even if we don’t have to spend more on external debt servicing in dollar terms in FY20. And, higher interest rates mean direct increase in the cost of interest payments on domestic debt both on its stock and on the additional debt acquired during FY19, if it’s servicing becomes due in FY20. The government is projecting Rs2.8tr on account of domestic and external debt servicing in FY20.

When the largest chunk of a country’s annual spending goes to debt servicing for years, there is something seriously wrong with its fiscal management. But is there a remedy? There is: let the nation starve and continue harsh cost-cutting for as long as required, bring back all the “plundered wealth” of the nation and stop revenue leakages. But it is easier said than done.

Letting the nation starve is unjust and cruel, bringing back “plundered wealth” has become just a political ploy and stopping revenue leakages without jamming the bureaucratic machine and annoying wealth creating class is too difficult.

It is in this backdrop that in June 3 cabinet meeting Prime Minister Imran Khan finally approved cash management and treasury single account policy. Under this policy, the government will maintain a single account with the central bank for managing public finance.

The purpose is to make government transactions more transparent and orderly, help policymakers make more informed decisions regarding debt management. By extension this should also help keep the cost of domestic debt borrowings under check.

Special Assistant to PM Imran Khan on information Ms Firdous Ashiq Awan says the government will implement the policy gradually without elaborating. However, according to the draft of the policy finalised by Finance Adviser Dr Hafeez Shaikh, full implementation of the policy will require 10 years. The approval of the policy by the federal cabinet should now help us win the final nod by the IMF board of directors to an initially agreed $6bn lending programme for Pakistan.

But how the implementation plan will pan out during the present PTI government and whether the next elected government would be able to carry it on is yet to be seen.

The advocates of Cash management and single treasury account (CM&STA) policy say it will make public sector cash flow management efficient, help the government in better domestic debt management and facilitate in smarter and timelier resource allocations. Banking industry, however, needs enough time to adjust to this policy as it means shifting of the public sector deposits spread across many banks to one consolidated account. As of December 2018, the federal government’s deposits alone were equal to 8.4pc of the total bank deposits.

The share of the deposits of the entire government sector (federal, provincial and city government) was equal to about 14.8pc. So, even if the federal government alone switches over to a treasury single account a number of banks will have to take a hit on their deposit base.

During the current era of low economic growth the implications of the switch-over to TSA is not going to be easy. We will have to wait a little to see what portions of this policy are implemented in FY20 and in the next 4 years of this government, and what is left for the next government. That is, if the current government is able to complete its five-year term.

Published in Dawn, The Business and Finance Weekly, June 10th, 2019