PESHAWAR – Pakistan’s financial woes are going from bad to worse as the national fiscal deficit surges to over 7% of gross domestic product (GDP) and could breach 9-10% as state revenues dry up amid Covid-19 economic devastation.
That’s raising questions among analysts and business executives of whether the country is headed towards a budgetary blowout-induced financial collapse.
Approved by the National Assembly on June 29, Pakistan’s 2020-21 budget is notable for a 3.4 trillion rupees (US$20.7 billion) fiscal gap that officials say will be bridged mainly by bank borrowing.
The new budget cuts subsidies, increases petroleum levies, caps salaries and pensions, and slashes provinces’ share of state revenues in a belt-tightening bid to tame the galloping deficit. That comes as economists predict the economy will slip into negative growth territory this year.
Fast-rising defense spending, a reflection of the military’s strong influence over Prime Minister Imran Khan’s coalition government, and high debt servicing liabilities, meanwhile, will both drain the national coffers at a time when the economy desperately needs a growth-stimulating fiscal infusion.
“The budget accentuates the fast-shrinking fiscal space which is symptomatic of a bigger economic abyss,” Agha Shahab Ahmad Khan, president of Karachi Chamber of Commerce & Industry (KCCI) told the Asia Times.
“If they did not make some structural adjustments, the country is likely to fall into a monetary crisis in the next financial year,” he predicted.
Over the last two years, coincident with slowing economic growth, Khan’s ruling Tehreek-e-Insaf (PTI)-led government has added nearly $22 billion to the nation’s international debt pile.
That figure includes $5.5 billion worth of borrowings from Saudi Arabia, the United Arab Emirates and Qatar, $6.7 billion from China and $4.8 billion from the International Monetary Fund (IMF) and Asian Development Bank (ADB).
Pakistan has also sought and recently received $1.39 billion from the IMF under a rapid financing instrument facility to cushion economic shocks caused by its Covid-19 outbreak. The country had at least 96,236 cases and 1,572 deaths as of July 7.
That injection, though, won’t likely be enough to stop the economic rot and contain spiraling inflation, which was up 11.8% from July to March 2020, according to the World Bank.
Khan’s government is at least partly, if not largely, to blame. During the PTI’s two-year-rule, Pakistan’s domestic debt has soared, increasing by 35% to 22.5 trillion rupees ($135.5 billion) as of the end of March.
The PTI has so far racked up 5.94 trillion ($35.7 billion) in domestic borrowings.
Revenue slippage and endemic tax evasion, including by politically influential industrial tycoons, real estate moguls and military top brass, have added to the debt burden, say economic analysts.
A faltering exchange rate, which depreciated a whopping 7.3% against the greenback in March, is hobbling the government’s ability to service its foreign debt burden. Foreign reserves stood at a meager $13.2 billion as of the end of March, enough to cover just 3.5 months of imports.
“The Covid-19 related implications for trade and industry are still not fully evaluated. Even in the pre-pandemic scenario, before December 2019, our economy was not doing well due to global recession, monetary distress and high interest rates,” Khan of the KCCI said.
He said that Pakistan already faced a “liquidity crisis” before the coronavirus outbreak and that the government needs to launch a “revival and survival” package to save the economy while also ensuring “a more fair distribution of resources.”
To cover the new budget deficit, the government will borrow 3 trillion rupees ($18.1 billion) from commercial banks in the form of three-month to 20-year treasury and sovereign bonds, according to the State Bank of Pakistan (SBP), the central bank.
At the same time, SBP reported that around 66%, or 1.98 trillion rupees ($11.9 billion), will be needed just to retire maturing domestic debts. The budget includes a 6.57 trillion rupees ($39.6 billion) revenue target for the new financial year starting on June 1.
Of that amount, 2.87 trillion rupees ($17.6 billion) will be distributed to the provinces, leaving the rest for national defense, debt servicing, general administration and development.
However, a senior executive at a consulting firm told Asia Times that the government’s 4.9 trillion ($29.9 billion) tax collection target is likely “pie in the sky” given the economic shock waves released by the pandemic.
“Even if the country managed to achieve the revenue target, the debt servicing liabilities will gobble up over 78% of the federal government’s revenue,” the executive said. He claimed the high and rising fiscal deficit points increasingly to a “debt trap” situation.
Like others, he believes the country’s debt burden is being unnecessarily inflated by high and rising defense budgets, which rose by 11.8% year on year to 1.29 trillion ($7.8 billion) in the newly minted budget.
That line item, financial analysts note, does not include provisions for defense pensions, which when taken into account balloons the total defense budget to 1.66 trillion rupees ($10 billion).
The consultanting firm executive estimated that defense spending accounts roughly for anywhere between 35% to 45% of net federal revenues.