What is the concept of ‘filling up` the government coffers. The inflow of funds in government account on various accounts including taxes, proceeds of loans-domestic as well as external-, privatisation proceeds etc. and their outflow on account of government expenditure, is a continuing process. Therefore, whether government coffers have been filled up or emptied/depleted can possibly be judged in accordance with the following criteria:
When there is continuous accumulation of funds in government account, the credit balance increases with the passage of time. The increase of funds in government account from time to time can take place when inflow is more than the outflow. This entails that governmental income (revenues from taxes/ income from government entities) continues to exceed the expenditure or in other words there is a fiscal surplus.
In case governmental expenditure exceeds the income or in other words there is a fiscal deficit, there will be depletion of the balance in government account. During the last seven-year tenure of the present economic managers, there has not been a single year when there was fiscal surplus. A table appended contains data about year-wise fiscal deficit.
It will be seen from the table that fiscal deficit ranged between 2.4 per cent of the GDP (minimum- fiscal 2003-04) to 5.4 per cent of the GDP (maximum during fiscal 1999-00). Despite fiscal deficits, the balances held in government accounts [ federal and provincial] with the State Bank of Pakistan (SBP) which stood at Rs13.59 billion as on the June 30,1999 (fiscal year ending immediately prior to the take-over by the present economic management team) increased to Rs147.097 billion as on the June 30, 2006-an increase of Rs133.507 billion. This means that the balances have increased not because of revenue generation but because of other factors.
Fiscal deficit
Fiscal year Fiscal deficit.
1998-99 3.4 @
1999-00 5.4 *
2000-01 4.3 **
2001-02 4.3 **
2002-03 3.7 **
2003-04 2.4 **
2004-05 3.3**
2005-06 4.2 **
Source: @Table IV.I page 45 SBP annual report for 1998-99. * Table 4.1 page 74- SBP annual report for 2004-05. ** Table 4.1 page 74 SBP annual report for 2005-06.
The second criterion to judge the ‘filling up` or ‘depletion/emptying’ of the government coffers is the decrease/increase in government borrowings. In case the volume of borrowings inflates with the passage of time, it would be deemed that governmental revenues are insufficient to cover the ongoing expenditure-or in other words government coffer has been depleted/ emptied and the borrowings have been resorted to against the future revenues in order to covering up the ‘depletion’ so that the day to day business of the government could be carried on.
The borrowings are resorted to domestically as well as externally. Let us examine the position of each separately:
External borrowing: The volume of external loans outstanding as on June 30, 1999 was $30.328 billion ( Page 111- SBP annual report for fiscal 1998-99 ) which has increased to $35.679 billion as at the end of fiscal 2005-06 depicting an increase of $5.351 million (page 127-SBP annual report for fiscal 2005-06) which is equivalent to Rs321.06 billion (@ $ 1= Rs60.
This is despite the remission of over $1.5 billion debt by USA alone [the amount may be much higher but the data about forgiveness of loans (conversion of the loans into grants) by other countries have not been disclosed by the authorities that be] and receipt of heavy inflows from abroad in return for rendering services to the West as a front-line state in the aftermath of 9/11 and curtailment in the repayment burden on account of rescheduling (re-profiling as it was called) of over $12 billion bilateral Paris Club debt.
Domestic loans: As per the SBP annual reports, the domestic debt (as of June 30, 1999) inherited by the present economic managers amounted to Rs1362 billion which has increased by Rs931 billion to Rs2293 billion as of June 30 ,2006 [ pages 103 and 123-SBP annual reports for fiscals 1998-99 and 2005-06 respectively]- an increase of over 68 per cent.
Cumulative increase in borrowings: Thus the cumulative addition to government borrowings made after October, 1999 take- over is of the order of Rs1252.06 billion.
This means that the depletion in government coffers to the extent of Rs1252.06 billion was financed by economic managers by borrowings internally and externally.
The third criterion to judge the ‘depletion’ in government coffers is the use of privatisation proceeds of the national assets in financing the day-to-day expenditure. The latest data about the proceeds realised is not available, but quite a sizeable amount (Rs400 billion or so) was received and used by the government in routine budget expenditure.
Thus instead of filling up coffers of government, the economic managers have ‘depleted’ it by heavy sum of Rs1518.553 billion [ addition in domestic and external borrowings Rs1252.06 billion plus use of privatisation proceeds in fiscal financing Rs400 billion minus increase in government balances with SBP Rs133.507 billion).
Co-relation between foreign exchange reserves and government coffers.
Government’s claim of filling up coffers may perhaps relate to the foreign exchange reserves build-up. As per SBP annual report for the fiscal 2005-06, the foreign exchange reserves held with the SBP as on June 30, 2006 amounted to $10.5 billion. These reserves as of June 30, 1999 were $1.8 billion. The annual inflow of workers’ remittances for many years before 9/11 ranged between $1-1.5 billion. In the aftermath of 9/11, the US Government and a few governments in the Middle East initiated anti-money laundering measures which diverted these remittances from hundi/hawala system to the official banking channels and currently these remittances exceed $4.5 billion annually.
How foreign exchange reserves are built up? When there are surplus funds in foreign exchange with banks, SBP purchases them away by crediting rupee equivalent to the selling bank’s account. This rupee credit by the SBP to selling bank is nothing else than creation of money. Thus foreign exchange reserves have been built up by SBP by creating money. As these reserves are owned by SBP, it is not appropriate to co-relate them with the filling up of/depletion in government coffer.