Growth Amidst Debt?
The federal budget for the year 2021-22 was presented to Parliament last Friday. With severe austerity and stabilization measures having featured prominently in previous budgets by the PTI government, the nation was praying for some major relief this time. This time there are no new income taxes and finding space for increase in salaries and pensions along with offering tax concessions to businesses and traders. It seems the government has struck a few correct chords of the public with the budget this time. Earlier Saddam highlighted some of the key positive measures in the budget, but for a developing country like Pakistan, the budget exercise always involves great brainstorming over sustaining debt and financing deficits. Let’s take a quick peek at the same in the proposed budget for the upcoming fiscal year.
The federal government debt and liabilities have increased to over PKR 3.7 trillion by end April 2021, compared to just over PKR 3.5 trillion in June 2020. As a result, the government has allocated PKR 3,060 billion for interest payments in the budget. This means, 41% of the federal government’s current expenditure, which also makes up 36% of the total budget expenditure, is to be spent on interest payments. The positive thing, however, is that there is a 5-percentage point decrease each in interest payment’s share in current and total expenditure. This extends some breathing space in the fiscal arena for the government, allowing them to use these additional available funds, however less, for developmental and other growth-oriented measures.
The federal government is aiming to raise over PKR 2.7 trillion from external resources to finance deficits, and this includes PKR 2.69 trillion in the shape of external loans. PKR 0.5 trillion will be accumulated as additional external resources in the upcoming year. The government intends to repay foreign loans and credits with 55% of these external resources. The remaining 45% will be available for the government to use for other purposes. This is a 9-percentage point decrease from the current fiscal year when we used 64% of external resources for repaying foreign loans and credits. The government hopes to use these funds at its disposal for additional developmental expenditures compared to the fiscal year 2020-21. This use of additional fiscal space is besides taking other policy measures to bring down some tax rates.
However, Pakistan’s debt and liabilities continue to rise, increasing over PKR 2 trillion in the current fiscal year. Despite increasing debt, Pakistan is currently displaying a downward trajectory in its debt servicing cost. This shows that our debt is becoming slightly less expensive than in previous years. If we achieve our revenue and growth targets, the tax-GDP ratio will increase by 0.2 to reach 12.2.
The Ministry of Finance’s Debt Policy Statement shows what the government aims for in the upcoming years and also represents the government’s intention regarding debt levels. They intend to achieve their goal through a combination of measures including revenue mobilization, rationalization of current expenditure and efficient utilization of debt. While we expect the Public Debt-GDP ratio to continue as before, a downward trend is visible in the Debt Service-Revenue ratio.
Mr. Shaukat Tarin, the new finance minister, has been clear about his goal of Pakistan achieving high growth. PIDE’s Reform Agenda for Accelerated and Sustained Growth also highlights the need to grow at higher rates to be able to sustain debt levels as well as create opportunities for new entrants in the labour force. While there is still a lot to be done to achieve sustainable high level of growth for longer periods, on the debt front the initial indicators are promising. They suggest that we are moving in the right direction and must continue improving in this aspect.