The consolidated fiscal report of the first six months released by the Ministry of Finance shows that the government used privatisation proceeds for financing the fiscal deficit. This, critics argue, is violative of not only the PML-N manifesto commitment but also of the privatisation law, which stipulates that 90 percent of the total proceeds generated through sell-off of any entity must be utilised for debt retirement and 10 percent for poverty alleviation. This usage of privatisation proceeds was confirmed by the Privatisation Commission Chairman Muhammad Zubair to a sub-committee of the Senate Standing Committee on Finance.
There is little doubt that the Ministry of Finance would ably defend itself by pointing out that budget expenditure includes debt servicing (a major component of our current expenditure) as well as repayment of principal amount as and when due, and money being fungible there is no way anyone can prove that the money was used for a purpose other than to retire the debt. Government stalwarts may also argue that so far there have been capital market transactions, which do not strictly fall under the head of privatisation proceeds because the government retains its majority shares. Additionally there has been little, around 15.2 billion rupees according to the fiscal report, generated from privatisation an amount too small to merit debate.
Be that as it may, economists world-wide support debt retirement from privatisation proceeds for one reason: if proceeds from the sale of a profitable state-owned entity, which is generating some non-tax revenue for the government that would dry up once the entity is sold, are used for debt retirement then the impact on the economy would be long lasting, subject, of course, to the government restraining itself from fresh borrowing. However, what is disturbing is the fact that irrespective of claims by the government in general and the Ministry of Finance in particular, the country’s domestic and international indebtedness has been steadily rising for the past two years. The Finance Minister’s frequent claims that he borrowed from abroad at 5 percent and retired domestic debt procured at 12 percent is not reflected in the budget documents where domestic as well as foreign debts have been steadily and disturbingly on the rise. Budget documents for the current year reveal that allocations for servicing domestic debt rose from the 2013-14 budgeted 1065 billion rupees to 1109 billion rupees with 1225 billion rupees budgeted for the current year. It needs emphasising that this is not the stock of domestic borrowing but the servicing on the debt.
Similarly servicing of foreign debt is budgeted to rise from last year’s revised figure of 264 billion rupees to 333 billion rupees. The fiscal report also reveals that the government borrowed 296 billion rupees from non-bank sources and 199 billion rupees from bank sources to partly finance 651 billion rupee deficit. This enabled it to show a deficit of 2.2 percent for the first six months as a consequence with assistance from provincial governments showing a 143 billion rupee surplus.
PML-N has been rightly adopting a policy of go-slow with respect to sale of state-owned entities mainly because nearly all require restructuring to ensure a good sale price. The government undertook to privatise around 65 state-owned enterprises to the International Monetary Fund (IMF) under the 6.64 billion dollar Extended Fund Facility (EFF), restructure those with prospects of profitability, but which the government wishes to retain in the public sector or close nonviable firms. However, another reason and many argue the critical reason for go-slow is that there is simply not enough interest in the domestic or international market for the government’s privatisation plan. That factor unfortunately continues to negatively impact on the government’s privatisation plans.