Urgent budgetary reforms, not aid, will save Pakistan
During the past fortnight, the government has gone to great pains for convincing a rather jittery market that soon Saudi Arabia will allow a deposit of $3 billion to augment Pakistan's foreign reserves. The terms of the assistance, not fully known yet, include a 4% interest rate, repayment after one year, and the overall assistance will have a $1.2 billion worth oil supplies on payment at a future date. This is indeed welcome news for the PTI government which is already facing the daunting task of getting the IMF Extended Fund Facility (EFF) programme back on track.
The above-mentioned announcements including the recent IMF staff level agreement hasn’t been enough to lift the rather low market sentiments. The first week of December has in fact seen Pakistani rupee shed value vis-à-vis all major currencies. That too, at a time when the central bank has record high foreign exchange reserves and continues to intervene for stabilizing the rupee. It should come as no surprise that assistance by Saudi Arabia or the restoration of the fund programme will on their own not stabilize the macroeconomic fundamentals for long. To make matters worse, the central bank’s November data revealed that the country’s external debt and liabilities increased by $13 billion (11%) during the past 12 months.
The continuous resort to Saudi help and IMF’s oversight has its roots in a couple of recurrent factors. First, the government is unable to support higher import payments whether for productive capacities or consumption. Despite decent growth in remittances from abroad and export receipts, increasing level of import payments – often a result of higher commodity prices abroad or conspicuous consumption behavior at home, end up landing the country in a balance of payments dilemma.
Second, the government’s own spending spree and losses in public sector operations in energy, transport, and food sectors end up forcing the exchequer to run high levels of budget deficit whose financing on commercial terms is now becoming unsustainable. The fund is ensuring that the federal government will not borrow from the central bank in the future.
A missing piece in the fiscal discipline jigsaw and ensuring robust debt management is the weak oversight role of the parliament.
Dr. Vaqar Ahmed
Plugging the holes in the government budget is also politically difficult for a coalition government whose very existence is usually on extending large financial endowments to coalition partners and their constituencies. This political economy has led to successive regimes breaching the Fiscal Responsibility and Debt Limitation Act – which required the debt to gross domestic product (GDP) ratio to be not beyond 60 percent.
The country is soon coming to a point where solvency and liquidity indicators will start showing sharp deterioration. The debt servicing capacity indicators have remained under stress despite the COVID-19 debt waiver. More robust debt management and oversight is now required as Pakistan embraces the new variants and waves of the pandemic. It is against this background that the limits of rule-based fiscal policy will be tested. Still however, a broad compliance with the recently promulgated Public Finance Management Act could help keep fiscal discipline broadly intact.
A missing piece in the fiscal discipline jigsaw and ensuring robust debt management is the weak oversight role of the parliament. Previously, the relevant standing committees use to invite policy think tanks to provide an independent view of the mounting debt – a practice not observed in the recent debt hike. Unlike many peer economies, the independent economic policy think tanks are rarely invited when the debt management framework is being finalized at the Ministry of Finance.
As Prime Minister Khan expedited efforts last year to call upon the G20 economies to extend the debt relief facility under DSSI, the development partners in Islamabad were seen reminding us that a country loses the legitimacy to ask for more debt or waivers if it is not exhibiting the capacity to plug losses accruing from varied sources including the energy sector and state owned enterprises.
The window is also narrowing down for the donor organizations in Pakistan many of whom may not come forward in a lavish manner given their own fiscal pressures at home and demands from their parliament to shrink aid budgets.
The way forward may be found in the Debt Reduction and Management Committee report prepared in 2001. The report asked the Ministry of Finance to “reduce the rate of future borrowing by reducing the fiscal and current account deficits, and reducing the large losses of state owned enterprises that augment the budget deficit.” The committee had also provided policy advice on “improving the effectiveness of government expenditures especially the use of borrowed resources.” Also, it asked to ensure “monitoring systems to effectively review and monitor progress on debt including on contingency management in the context of a rolling medium-term macroeconomic framework.”
A stronger political will and commitment to implement urgent budgetary reforms could save future generations from the possibility of unprecedented debt-- which they will struggle to retire.
*Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.