Government borrowing

THE hefty increase in the government’s domestic borrowings to finance its budget indicates its deteriorating fiscal position, and underlines many risks to macroeconomic stability and growth prospects. The government’s borrowings of Rs916bn during the first eight months of the current financial year are 55 per cent more than the Rs590bn it had sucked from the banking system to fund its fiscal deficit during the year 2010-11. This is in spite of the 28 per cent increase in tax collection to Rs1.12tr from a year earlier. It points to substantial expenditure slippages mainly on account of energy and other subsidies. This also belies the claim repeatedly made by the managers of the country’s economy to achieve the fiscal deficit target of 4.7 per cent of GDP. Going forward, the government’s need to borrow more from the domestic banking system is projected to grow heavily during the remaining four months of the current fiscal to June, not least because of drying foreign official and private capital inflows and rising energy subsidies. Matters have been made more complicated by the delay in the auction of the 3G telecom licences that is expected to bring in $800m and the reluctance of the US to release the Coalition Support Fund.

The high fiscal deficit and the government’s borrowings to finance it are at the heart of all the economic problems Pakistan faces today. The widening deficit means that inflationary expectations remain high and private investments subdued. The deficit has substantially reduced the government’s ability to fund energy and other infrastructure projects, crucial to boosting economic growth. True, many unfavourable factors like devastating floods, poor security conditions, the global economic recession and rising world oil prices have contributed to the fiscal woes of the government. But it must take responsibility for not addressing structural imbalances like the low tax-to-GDP ratio, energy shortages, rising untargeted energy and other subsidies etc, the major factors behind the deficit over the last four years. Unless these structural issues are dealt with once and for all, the task of controlling deficit and bolstering private investment growth will remain
challenging even beyond this fiscal.