M Ziauddin
Federal Finance Minister Ishaq Dar presented last Friday his fifth and presumably his and the PML-N government’s last federal budget before the next general elections.
There is not much to write home about the balance-sheet for 2017-18 except that it is another one of those conventional attempts at presenting inflated data for the incoming year while revising downwards the targets set in the outgoing year - a practice resorted to by most preceding governments since almost independence.
There is the usual attempt to increase the size of the budget by manifolds over the outgoing one, promising to collect a significantly larger amount under the revenue and non-revenue heads and pledging at the same time to spend more than what was spent in 2016-17 on development and the resulting yawning gap to be filled with a massive deficit financing which means more debt anticipated to reach a colossal $80 billion by the end of next year forcing the country to borrow more to avert default.
On the face it, it appears as if that a government coming out of the IMF-induced austerity phase has decided to spend its way out of the black-hole of stagnation. But considering the huge amount reserved under the Prime Minister’s discretionary fund for the year, it looks more than possible that the spendthrift budget has been conceived with the elections in mind.
Most of this discretionary funds in the hands of the PM and the Punjab Chief Minister are likely to be used to keep the Punjab electables of the PML-N from decamping under the pressure of the Panama investigations.
One would not have doubted the use of this discretionary fund under the development budget had the amount been clearly marked for investment in profitable public sector enterprises that would have partly taken care of dwindling rate of domestic savings rates.
Indeed, with the annual average domestic saving rate hovering between 7-8 percent of the Gross Domestic Product (GDP) for almost a decade it is well neigh impossible for the country to achieve a growth rate of even 5 percent without massive input of external resources.
But one needs to be very very careful about the nature of these external resources. Remittances, export earnings, Foreign Direct Investment (FDI), grants, concessional multilateral assistance with conditions not affecting economic or political sovereignty are all welcome but not politically conditional assistance and commercial loans carrying very high interest rates.
Going by what the current government has resorted to over the last four years in order to fill the widening gap between stagnating domestic saving rates and the sky rocketing expenditure needs one is at a loss to understand how the needed resources could be mobilized to amortize the loans being contracted by the PML-N government for the next year as well as those that were contracted during the last four years.
Pakistan has the lowest savings as a percentage of its GDP in the region, excluding Afghanistan. This has hampered economic growth that is not even 6pc, which is generally considered the base level to create enough jobs to absorb new entrants to the workforce every year.
According to a report, the five-year average saving rate in India, Bangladesh and Sri Lanka was 31.9 percent, 29.7 percent and 24.5 percent, respectively.
The State Bank of Pakistan (SBP) did not release domestic savings as a percentage of GDP for 2015-16 and 2014-15, which in a way confirms the assumption that it had remained too low during these years to be recorded.
The same report showed domestic savings for 2013-14 at 7.5pc. In the outgoing year as well the domestic saving rate had remained stuck at 7.5 percent.
Economists believe increasing domestic savings, which were about 15pc of GDP in the beginning of the first decade, is imperative for economic growth while reducing reliance on uncertain external factors like remittances or for that matter costly borrowing the repayment of which has now started eating into public development funds.
In the incoming year, interest on the past loans alone has gone up to Rs 1.3 trillion while the development budget has been allocated Rs 1.1 trillion and defence budget Rs 920.1 billion.
The Federal Finance Minister, Ishaq Dar, at the post-Budget press conference hoped that Pakistan would receive Rs141.8 billion or $1.33 billion from the US on account of the CSF disbursements, although he had revised downward the receipts for outgoing fiscal year. Against the original budget estimates of Rs 170.7 billion, the government has now adjusted the amount to only Rs 74.5 billion.
After a change of administration in Washington, many issues between Pakistan and the US remain unresolved including future assistance to Pakistan, according to people privy to the developments.
According to sources, the defence ministry, based on understanding with US authorities, has estimated receiving at least $1.5 billion under CSF during 2017-18. But the finance ministry has not yet received positive signals from Washington.
However, Pakistan does not treat CSF as aid and the US military aid to the country is in addition to disbursements under that arrangement. CSF receipts are second most important source of non-tax revenues for Pakistan, after the State Bank profits, and contribute about 18 percent to the total annual non-tax receipts.
According to Pentagon data, about $14 billion (approximately Rs 140 billion) has already been paid to Pakistan under the CSF since 2002. And according to the Economic Survey-2016-17 the cost of terror war for Pakistan has been estimated at $ 123.13 billion and the country has been annually spending Rs 90 billion to Rs 100 billion in the war on terror.
Pakistan plans to obtain $8.1 billion new loans in next fiscal year for project and budget financing – 27 percent or $3 billion – less than the revised budget estimates for the outgoing year, suggesting that the government is not telling its exact borrowing plan to parliament.
For fiscal year 2016-17, the government had budgeted $8 billion in foreign loans, but it has now revised the estimates upwards. New estimates showed that actual foreign borrowings might even cross the $11-billion-mark. If the revised borrowing plan materializes, this will be the highest-ever borrowing in a single year in the country’s history.
The Finance Ministry had to borrow more to fulfill external sector requirements after Coalition Support Fund disbursements, foreign remittances and exports receipts fell far below expectations.
The main reasons behind $3 billion additional borrowing in the outgoing fiscal year were mounting foreign debt repayments and interest requirements. The additional $3 billion are primarily originating from China – the country’s new lifeline after change of mood in Washington.
Against original estimates of $572 million, China is expected to disburse $2 billion in the outgoing fiscal year. Another source of additional foreign loans is commercial banks and again a major chunk is coming from Chinese banks.
For the outgoing fiscal year, the government had budgeted $2 billion loans by foreign commercial banks. But revised estimates show that we may end up taking $3.7 billion worth foreign commercial loans. About 62 percent of foreign commercial loans – $2.3 billion to be precise – are coming from Chinese financial institutions.
Industrial and Commercial Bank of China gave $300 million, the China Development Bank is expected to provide $1.7 billion, including $1 billion coming this month, and the Bank of China is likely to give $300 million.
The country would obtain $700 million foreign commercial loans under World Bank Policy Based guarantees. It is also seeking another $300 million foreign commercial loan before the end of next month.
About one-fifth of new loans, or $1.6 billion, would be obtained from China for project financing. This will be the highest contribution by any single source, followed by $1.56 billion by the Islamic Development Bank (IDB). IDB loans will be expensive, as the country again intends to use this short-term facility. The World Bank will provide $1.34 billion or 16.6 percent of the estimated new loans.
Pakistan also plans to issue $1 billion worth of Eurobonds in the next fiscal year, besides obtaining another $1 billion in foreign commercial loans.
The Asian Development Bank (ADB) is expected to provide $1.2 billion or 15 percent of the estimated foreign economic assistance.
The borrowings from other traditional sources would not be very significant and the countries such as Saudi Arabia, Kuwait, Japan and European nations would not contribute much except France which is giving $157 million next year, said the sources.
The United Kingdom may provide $115 million grant in the next fiscal year. The United States contribution on account of Kerry-Lugar aid, very doubtful though, is estimated at $118 million.
Of $8.1 billion, $1.84 billion would go to the provinces for development projects. Punjab will get $1.1 billion, followed by Sindh $400 million, Khyber-Pakhtunkhwa $280 million and Balochistan nearly $60 million.
Autonomous bodies will get $1.35 billion loans, primarily the National Highway Authority (NHA) $810 million, PEPCO $350 million and Wapda nearly $200 million.
Because of declining inflows, the central bank also failed to maintain its foreign currency reserves at the level projected by the International Monetary Fund (IMF). The fund had projected reserves at a comfortable $19.1 billion position by December last year. But the actual reserves did not rise above $11.5 billion, resulting in a deviation from the forecast.
According to the Economic Survey of Pakistan, a 12.75% growth was registered in the out-going year in Foreign Direct Investment as compared to last year. Currently, Pakistan’s FDI stands at a paltry Rs. 1.733 billion whereas last year it stood even lower at $1.537 billion.
Major FDI inflows during the period under review were from China ($ 744.4 million), the Netherlands ($478.6 million), France ($171.0 million), Turkey ($137.7 million), the US ($103.2 million), the UAE ($ 48.4 million), the UK ($47.6 million), Italy ($ 47.4 million), Japan ($ 42.1 million) and Germany ($ 40.5 million).
