Economic dilemma: Excessive govt borrowing shakes public trust

Audit report says govt has missed core objectives of Debt Limitation Act.

ISLAMABAD:

Incessant government borrowing from the central bank to finance the budget deficit is shaking public trust in national economy and eventually leading to financial crisis and pushing the country into debt trap, warns an audit report.

The report comes at a time when the budget deficit has shot up to record due to political compulsions and mismanagement on the part of economic managers who have failed to implement prudent fiscal policies.

The special performance audit report on Fiscal Responsibility and Debt Limitation Act 2005 revealed that the government has missed all core objectives enshrined in the Act, resulting in a situation where people have started losing confidence in the economy.

The main objective of the audit was the overwhelming need to enforce fiscal discipline in the country.

The report, prepared by the office of the Auditor General of Pakistan, stated that central bank lending to finance the fiscal deficit has been a key driving force behind high inflation over the last few years.

The State Bank of Pakistan has recently reported that the central government borrowed Rs1.28 trillion to finance the budget deficit during the just ended fiscal year 2011-12. In 2008, when the ruling alliance came to power, government borrowing stood at Rs519.9 billion.

In the absence of major tax efforts, audit officials said, government borrowing from the central bank is in violation of the SBP Act 1956 and the agreements signed with the International Monetary Fund (IMF). The auditors observed that the fiscal consolidation achieved in the first year of the IMF programme lost momentum thereafter due to an easy fiscal policy.

The report referred to a warning given by the IMF to Pakistan’s economic managers. The IMF cautioned that the policy mix adopted by the economic managers was leading the economy down an unsustainable and risky path and high fiscal deficits were sidelining the private sector while hurting growth.

Despite knowing the seriousness of issues raised by the audit officials, the economic wizards did not respond to the questions affecting the lives of 180 million people of the country.

Neither the revenue deficit – the gap between revenues and current expenditures – could be eliminated nor the public debt kept within prudent levels, observed the report.

The Act requires a firm commitment from the government to debt and fiscal prudence, elimination of revenue deficit, generation of revenue surplus and reduction in debt.

The audit officials warned that the economy was in “royal trouble” due to slowdown in export growth, energy shortages and pressure of IMF loan repayments.

The report stated that due to massive borrowing total debt and liabilities crossed Rs12 trillion a year ago compared to Rs6.5 trillion when the PPP-led coalition government took over. Domestic debt, which was at Rs3.9 trillion, rose to Rs7.5 trillion up to May this year.

The audit observed that change in the composition of domestic debt has further complicated debt management. There has been a significant increase in short-term debt, estimated at 55% of total debt. This has exposed the government to debt rollover and increase in interest rate.

“The domestic debt trap will result in a situation in which the government will enter a spiral of increasing bank borrowings to service and repay the previous debt,” warned the report.

Criticising the government’s complacency over restricting the debt to 60% of GDP, the report warned that the government needs to be cautious as over 80% of the debt crisis at the international level came at a debt-to-GDP ratio of less than 60%.

Published in The Express Tribune, July 11^th, 2012.