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MoF’s response to editorial: ‘PM not properly briefed’

This is with reference to the editorial published in Business Recorder on April 13 titled “PM not properly briefed”. It is for the first time in history of Pakistan that the country is completing the “Extended Fund/Credit Facility Programme” with the IMF. The programme that was completed as stated in editorial during Musharraf era was Stand-by Arrangement (SBA). So far Pakistan has undergone 08 EFF Programs and 07 were abandoned early to mid- course while this one is the Eighth one which is nearing completions as even praised by IMF delegation and also other international rating agencies.

The Finance Minister in an article on Public Debt Management published in leading newspapers on 19th March, 2016 has talked about debt to remove misconception and to set the record straight. It is important for the writer to read this article for clarity.

The statement that high amount of loans due for payment in next two years which may lead to another IMF programme is not correct since the government is only required to repay around $4.0 billion in 2016 and $2.8 billion in 2017. It is further evident from the fact that share of external loans maturing within one year was equal to around 28 percent of official liquid reserves at the end of 2014-15 as compared with around 69 percent at the end of 2012-13 indicating improvement in foreign exchange stability and repayment capacity.

The statement that reserves positions have been shored up through heavier than ever reliance on borrowing is also not correct. Present government has repaid over $10 billion of external debt till end December 2015, which mainly related to the borrowings of the previous governments. Despite this heavy repayment, the foreign exchange reserves of the country have risen to more than $20.5 billion, of which SBP reserves were $15.8 billion at end December 2015, which is equal to nearly four months of import-cover as compared to less than around 3 weeks of import-cover in February 2014 when the SBP reserves stood at $2.8 billion. The latest reserves position as on 13 April, 2016 is more than $21 billion. It is worth mentioning here that while the external public debt has increased by $5.23 billion during the last two and a half years, the forex reserves of SBP have increased by $9.8 billion in the same period or by $13 billion when compared to from February 2014 to December 2015.

Further, the article claims that domestic borrowing is crowding out the private sector is also incorrect. The policy rate was cut significantly to encourage more credit to private sector and enhance productivity and exports. Contrary to writer claim, the credit to private sector has in fact increased during last year as compared with the previous fiscal year. Further, crowding out of private sector occurs when there is no liquidity available with commercial banks; however, in presence of SBP OMO and availability of discount window, there is as such no issue of liquidity and crowding out of private sector.

The article also used incorrect figures with regards to public debt to GDP ratio and interest payments. In contradiction to the article claim regarding heavy borrowings, the debt burden of the country has been in fact reduced as Public Debt to GDP ratio fell from 64 percent in 2012-13 to 63.5 percent at the end of 2014-15 as compared with 65 percent as mentioned in the article. Further, interest payments constituted 24 percent of total government expenditures as compared with 40 percent as stipulated in the article. Further, interest payments on domestic debt as percentage of GDP are moderate at around 4%.

The external sector is stable on the back of robust growth in remittances, continued flows from IFIs, stable exchange rate, remarkable reserves, the FDI is more than 15 percent higher during first nine month of CFY compared to last year, the current account remained surplus in February 2016 and during first eight month deficit contracted by 4.5 percent. For enhancing exports PM has recently approved SPTF which will certainly help in export sector. The decline in exports may need to be viewed in context of exogenous factors also rather criticising.

The policy rate is 42 year lower. The expansion in credit to private sector is more than 107 percent. A positive development is that credit to fixed investment is taking place which is a sign of improved development activities. The cement dispatches are higher more than 19 percent. The utilities growths are much higher than last year. The development spending is also 100 percent higher if to compare with FY 2013. The CPEC investment will further help in both public and private investment which will have spill over impact on all sector of economy, so the editorial reference to an economist’s claim that growth will not be more that 3-3.5 percent is meaningless as it has been estimated with no assumptions while only taking decline in cotton production and ignoring other positive development.

Ejaz Wasti, "MoF’s response to editorial: ‘PM not properly briefed’," Business recorder. 2016-04-18.
Keywords: Economics , Loans--Law and legislation , Federal Reserve banks , Support (Domestic relations)--Taxation , Transfer payments , Economies of scale , EFF , IMF , SBA , OMO , GDP , FDI , SPTF , CFY , CPEC