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Primary versus budget deficit

Setting time bound quantitative targets for primary deficit, defined as minus interest and repayment of principal as and when due, is a new International Monetary Fund (IMF) condition for Pakistan applied for the first time in the ongoing 6 billion dollars Extended Fund Facility programme instead of the standard condition of budget deficit containment in the previous twenty-two programme loans.

This condition is a serious design flaw of a Fund programme for three reasons. First, it allowed the newly appointed economic team leaders to quickly accept all harsh upfront politically challenging conditions on 12 May 2019 that quickly depleted the Khan administration of its political capital while successfully shifting the focus of the cabinet away from the massive envisaged increase in reliance on borrowing during the programme period (thirty nine months) which explains the unprecedented rise in: (i) domestic debt – from 16.4 trillion rupees in 2017-18 to 28.2 trillion rupees by the end of the current fiscal year as projected by the Fund in its sixth review documents uploaded on its website – or an unprecedented and untenable rise of 71 percent in four years of the Khan administration; and (ii) external borrowing rose from 95 billion dollars mid-2018 to over 130 billion dollars today – a rise of 37 percent in less than four years. While a little more than half of the increase in external borrowing was to repay loans incurred by the previous administration, the focus of the economic managers in their interactions with the prime minister/cabinet and the media, yet a part was to shore up foreign exchange reserves (at least 50 percent of the foreign exchange reserves held by the State Bank of Pakistan are borrowed — be it from multilaterals/bilaterals/debt equity or swap arrangements) and a sizeable amount of 10 billion dollars has been used to fund the government’s budgeted expenditure since 2018 – a fact acknowledged by the government in parliament a few months ago.

To compound this design flaw, the 10 billion dollars funded current as opposed to development expenditure with implications for inflation rather than growth. In 2017-18 the current expenditure allocation was around 4.3 trillion rupees (inclusive of the 110 billion rupees disbursed under the Benazir Income Support Programme which was itemized under development expenditure outside the Public Sector Development Programme that year though since it is credited under current expenditure) while it is budgeted at 7.5 trillion rupees in the current year – a rise of nearly 74 percent which does not include the relief package announced by the Prime Minister on 28 February this year. Government estimates place the cost of this package at around 300 billion rupees while independent economists project the cost of the package at 500 billion rupees. The exact amount cannot be determined given the uncertainty as to whether the Prime Minister would be able to keep his pledge to implement this package till end of fiscal year given the ongoing talks with the IMF on the seventh review and the economic fallout of the ongoing Russia-Ukraine war globally and on Pakistan.

The rise in the budgeted current expenditure is, bafflingly, in spite of the fact that the government did not budget foreign interest and repayment of loan to G-7 countries in 2020-21 and 2021-22 as it availed the G-7 debt relief initiative extended to poor countries struggling to meet the pandemic challenges. The key to this initiative is deferment and not write-off and to get an idea of the minimum amount under this head that would have to be accounted for in next year’s budget it is appropriate to consider 1.3 trillion rupees disbursed under this head in the revised estimates of 2018-19.

Be that as it may, in the 2020-21 budget the government attempted to contain current expenditure in total terms — from 7.3 trillion rupees in the revised estimates of 2019-20 (against the budgeted 7.2 trillion rupees) to 6.34 trillion rupees in 2020-21 by freezing salaries of civilian and military personnel (budget documents for the current year indicate total current expenditure of 6.58 trillion rupees last year).

As a percentage of GDP, current expenditure was 17.3 percent in 2017-18, the last year of the PML-N government, increased to 20.7 percent during the first year of the IMF programme, down to 19.1 percent in 2020-21 and is projected to decline to 19.5 percent this year. PSDP was 4.2 percent of GDP in 2017-18, a major source of growth as correctly pointed out by Tarin soon after his appointment last year, declined to 2.5 percent in 2020-21 though the projection of 3.4 percent for the current year maybe based on data that is no longer valid as it has already been cut by 200 billion rupees and is expected to be further slashed to fund the relief package.

Thirdly, the focus on the primary deficit allowed the IMF in its staff-level agreement on 12 May 2019, before programme approval by its Board of Directors, to issue the following statement in its press release: “financing support from Pakistan’s international partners will be critical to support the authorities’ adjustment efforts and ensure that the medium-term program objectives can be achieved.” Previously going on the Fund programme did not come with either a pledge to roll over existing loans (11 to 12 billion dollar loans were procured by Imran Khan soon after he took oath as the prime minister from three friendly countries notably China, Saudi Arabia and the UAE) till the scheduled end of the Programme (September 2022) but Pakistan’s then two newly appointed team leaders also agreed to borrow an additional 26 to 26.5 billion dollars from external sources for the programme duration.

To conclude, the onslaught of Covid-19 legitimately increased the 38 billion dollars external financing requirements noted by the team; however, had the government desisted from funding current expenditure from borrowed funds from external sources, to the tune of 10 billion dollars, the country’s indebtedness would have certainly been more contained. That this trend is continuing to this day bodes ill for the future.

Anjum Ibrahim, "Primary versus budget deficit," Business recorder. 2022-03-14.
Keywords: Economics , Monetary fund , Economic team , Foreign exchange , State Bank , Income support , Covid-19 , Imran Khan , Pakistan , China , Saudi Arabia , UAE , IMF , GDP , PML-N

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