The federal government borrowed heavily from the commercial banks, to the tune of 647 billion rupees during the first six months of the current fiscal year, thereby sparing the State Bank of Pakistan (SBP). Had the government borrowed from the SBP it would have been unlikely to able to convince the International Monetary Fund (IMF) to conclude the sixth review under the 6.64 billion dollar Extended Fund Facility (EFF) which, in turn, would have led to yet another foreign exchange reserve crisis. As noted in the fourth and fifth IMF review “foreign exchange reserves have risen sharply under the programme” (not attributable to a trade surplus backed by a rise in domestic productivity but to Eurobond and sukuk bond issues at a rate well above the prevailing international market rate); and “the authorities will provide staff a monthly calendar of fiscal financing sources, including T-bills and PIB auctions, consistent with curtailing government borrowing from the SBP”. In other words, the government has met this condition through heavier reliance on borrowing from domestic banks, which would crowd out private sector borrowing that the PML-N manifesto maintains would be its preferred engine of growth. Be that as it may, the cost of commercial borrowing by the government to the common man is significant with the annual interest payments on loans taking up a steadily rising pie of our resources thereby shrinking the allocation for development expenditure.
The privatisation plan as contained in the first Letter of Intent submitted by the Government of Pakistan to the IMF was stalled because of continuing recession in Eurozone countries as well as a downturn in private sector economic activity in Pakistan due to not only the government’s policy to borrow from private banks thereby crowding out private sector borrowing but also due to the continuing law and order situation. Be that as it may, the Federal Finance Minister Ishaq Dar was briefed by the Chairman of the Privatisation Commission on the privatisation programme that is underway – a meeting that has led many to conclude that the need to generate resources from privatisation has become acute. This was expected in the aftermath of the need to release funds for the revised National Action Plan – an amount well in excess of what was budgeted. One would, however, hope that the Finance Minister’s directive to the Privatisation Commission to make the process transparent and to reconvene meeting in a few days to deliberate on the privatisation of discos and HBL is followed to the letter instead of heeding the resource demands solely.
It is not surprising that the federal government is compelled to grapple with resource constraints as this state of affairs has become the norm with successive Pakistani governments, including the incumbent, presenting budgets that overestimate resources and underestimate current expenditure with the objective of showing a sustainable deficit. To meet the gap the federal government has already raised post-budget taxes on five products: (i) 200 rupee regulatory duty on each mobile phone, (ii) 15 percent regulatory duty on import of steel products like billets, bars, wire rods and 5 percent regulatory duty on flat rolled products of iron and non-alloy steel, (iii) 20 percent regulatory duty on import of sugar, (iv) 20 percent import duty on wheat, and (v) 5 percent withholding tax on foreign non-resident shareholders who enjoy dividend income from Pakistan but do not file income tax statements. However, the sum total collected from these sources is not enough to meet the spike in expenditure, which explains why borrowing has increased and the need to sell off national assets has become greater.
The government needs to revisit some of its policies notably the rate of decline in the deficit as agreed with the IMF should be phased out so as to encourage domestic productivity, borrowing from the commercial banks be limited to promote growth led by private sector and sales tax act that does not make parliamentary approval mandatory for the Federal Board of Revenue to impose new taxes should be debated in parliament to ensure that all are on board.