Daily Times

The previous PML-N government has left Pakistan in a mess. It was prone to bad governance and poor policy making which wrecked the country’s economy. An example of bad governance was the constant downward revision of tax targets by the previous PML-N government.

On April 29, 2017, the Federal Finance Minister had announced that the fiscal year’s tax target of Rs3.621 trillion had been revised downwards to Rs3.5 trillion.

This wasn’t the first time such a downward revision had been made. Saudi Arabia had given a $1.5 billion grant to Pakistan three years ago, which remained unutilized till April 29, 2017 when the federal finance minister announced that the Nawaz Government would set up a Pakistan Infrastructure Bank with the help of the World Bank and others. Much earlier in April 2017, the FBR had admitted to a revenue collection shortfall of Rs100 billion. Not only had the FBR then been holding back refunds to the tune of Rs200 billion, there were also off-budget deficits that had then amounted to over Rs400 billion.

Then the real budget deficit had been projected to hit 6 percent of the GDP as opposed to the budgeted fiscal deficit limit of 3.8 percent of the GDP. The budgetary deficit at this level was not sustainable, Farrukh Saleem, a noted economist had then argued that “there are five logical consequences: additional debt, higher taxes, higher debt payments, higher rates of interest and higher rates of inflation. Unfortunately, our future will have all five: additional debt, higher taxes, higher debt payments, higher rates of interest and higher rates of inflation”.

Earlier, in 2013 when the PML-N government came to power, the current account deficit was $2 billion a year. Today, the current account deficit has increased to a staggering $2 billion a month

Another example of bad governance was the persistent problem of circular debt. In 2013, the last PML-N government had paid off a mammoth Rs480 billion outstanding circular debt. By March 2017, circular debt had once again reached Rs414 billion. In early May 2018 it reached a staggering Rs1000 billion which was considered as a grave threat to the economy.

The unaddressed circular debt had caused power outages in the summer which was contrary to the claims of the last PML-N government of producing electricity up to 25,000 MW, more than the total demand. The chronic circular debt had forced the government to buy fuel, resulting in a loss of around Rs400 billion to the industrial sector.

The PML-N government had failed to carry out any fundamental energy sector reforms at all. Undoubtedly, the PML-N government also faced a credibility problem because of a lack of transparency.

Previously, there had been some muted criticism of the CPEC because it suffered from lack of transparency. The official website contained just a list of projects but not enough details about them. This paucity of information about CPEC was bewildering, to say the least.

The need for greater financial transparency was then felt so that CPEC-related changes in the total debt of Pakistan could be properly studied and correct policy recommendations could be derived to ease the debt burden. Meanwhile, Pakistan’s emphasis on coal-fired power was also criticized. It was argued that the CPEC need not convert Pakistan into an environmental wasteland. The country did not need to dirty its energy landscape with these plants, when China itself was phasing out coal.

Earlier, in 2017the debt burden carried by Pakistan had reached levels which had then aroused concern in the Asian Development Bank (ADB) and the IMF.  In the previous fiscal year (2017-18), the budget deficit had increased to 6.8 percent of GDP or Rs2.3 trillion. In absolute terms, it was the highest-ever budget deficit recorded in Pakistan’s history.

The previous PML-N government had set the budget deficit target at 4.1 percent of GDP, which had been breached by a wide margin. Historically, the budget deficit and current account deficit were major reasons behind seeking bailout packages from the IMF. For this year, the last parliament had approved a budget deficit target of 4.9 percent of GDP or Rs1.9 trillion. But, the initial trends were not positive.

The budget deficit in the first month of the new fiscal year was close to Rs150 billion or 0.4 percent of GDP, significantly higher than the one recorded in the same month of the last fiscal year. Higher interest payments were the main reason for excessive spending in July. Interest payments in July alone had amounted to two-thirds of the total spending, indicating that controlling current expenditures would be an uphill task for the PTI government.

The last National Assembly had sanctioned Rs1.62 trillion for debt servicing in the ongoing fiscal year and about 15 percent of that has already been consumed in a single month. Meanwhile, the country’s foreign currency reserves were expected to again fall below $9 billion mark by the end of September, even after Pakistan had secured a $2 billion official inflow from China and arranged $1.4 billion commercial loans over the past two months.

One of the most important failures of the previous PML-N government was the inability to meaningfully increase the tax-to-GDP ratio which was 10 percent in 2013 to only to 12.5 percent in 2017.

On top of this all, Pakistan is now facing a very serious current account deficit crisis as well. Earlier, in 2013 when the PMLN government came to power, the current account deficit was $2bn a year. Today, the current account deficit has increased to a staggering $2bn a month. Asad Umar, future finance minister said in August 2018 that this was a 12-fold increase and was unsustainable. “Given that, the most urgent action required of the government will be to deal with this crisis.” Hopefully the new PTI government is up to the task.

The writer is a freelance columnist

Published in Daily Times, August 19^th 2018.