March 8, 2019: The ministry of finance on Friday clarified a report in a section of media which contends that the government has borrowed Rs.2.9 trillion in just 7 months to finance budget deficit which is not correct as increase in debt stock cannot be termed as borrowing of the government.
A statement of the ministry explained that the increase in debt stock incorporates devaluation impact due to depreciation of Pak Rupee against US Dollar as well as impact of increase in credit balance of the government with the banking system, it added.
In terms of US Dollar, central government’s external debt increased from $64.1 billion at the end of June 2018 to US$ 65.8 billion at the end of January 2019.
Therefore, an increase of around $1.7 billion was recorded in central government external debt during first seven months of current fiscal year compared with the increase of $5.9 billion during the same period last year.
In rupee terms, central government external debt amounting $65.8 billion becomes equivalent to Rs.9, 096 billion at an exchange rate of Rs.138.25 per USD.
Therefore, the value of central government’s external debt has increased by Rs 1,300 billion during first seven months of current fiscal year (from Rs 7,796 billion at end June 2018to Rs 9,096 billion at the end of January 2019).
Here, it needs to be understood that out of this increase of Rs 1,300 billion, around Rs 1,100 billion or 85 percent is attributable to depreciation of Pak Rupee against US Dollar.
Hence actual borrowing was significantly lower than what is reported in the news report. It is also worth noting that depreciation of Pak Rupee increases the rupee value of external debt (reporting loss), but does not add much too foreign currency liability of the country during any particular fiscal year.
Similarly, apart from domestic financing of fiscal deficit, increase in credit balances of the government with the banking system has resulted in increase in domestic debt stock.
In the light of above mentioned facts, Ministry of Finance refutes the claim of news report that federal government has borrowed Rs 2.9 trillion in just seven months to finance the budget deficit of the country.
In fact, actual borrowing for financing of budget deficit was much lower and rest of the increase in public debt can be explained through above mentioned factors.
Moreover, the news report contains self-contradictory statements, as on one hand it states that Pakistan recorded a budget deficit of one trillion rupees during first six months of current fiscal year while on other hand it states that government borrowing for financing of fiscal deficit was almost three times during first seven month of current fiscal year.
There is also a need to understand that present government inherited many challenges on domestic and external front which forced it to borrow to meet its social and development goals.
Particularly, Public Debt to GDP ratio was 72.5 percent at end June 2018 as against threshold of 60 percent as stipulated under FRDL Act while Federal Fiscal Deficit (excluding foreign grants) was 6.5 percent during 2017-18 against the threshold of 4 percent. Resultantly, existing debt obligations contracted by the previous governments consumed around 37 percent of government revenues during 2017-18.
Since major chunk of revenue is consumed by debt servicing, additional borrowing is required to meet other current and development expenditure. Similarly, on external front, increase in imports pushed the current account deficit to a historic level of around USD 19 billion during 2017-18, which exerted pressure on foreign exchange reserves as well as on exchange rate which depreciated by around 32 percent during last one and half year. This has not only contributed towards fueling the inflation but has also increased the stock of external public debt significantly.
Given, this prevalent economic situation, a multipronged strategy is being pursued with focus to substantially increase tax revenues and country’s foreign exchange earnings. At the same time, reducing unnecessary expenditures with curtailment of losses of public sector enterprises is also being pursued to bring down the deficit. Government has also taken initiatives to expedite institutional reform and promote austerity to reduce non-development and non-productive spending. All these measures are expected to reduce the debt burden of the country in the medium term, the statement concluded.