Govt Borrows Rs 3.4 Trillion to Account for Budget Deficit During FY19

The government has borrowed Rs. 3.44 trillion to finance its budget deficit during FY 2018-19, while the figure of Rs. 11 trillion is being reported by a section of the media as an increase in total debt and liabilities requires certain clarifications, said a press release issued by the Ministry of Finance.

Ministry of Finance on Tuesday explained that total debt and liabilities increased by Rs. 10.33 trillion (from Rs. 29.88 trillion to Rs. 40.21 trillion) in the last fiscal year, however, the government has just borrowed Rs. 3.44 trillion to finance its budget deficit.

It is useful to analyze the growth in each of the five distinct components of the overall debt and liabilities figure.

Total Public Debt

First, total public debt increased by Rs. 7.75 trillion during FY 2018-19, out of which:

1. Rs. 3.44 trillion (44%) was borrowed for meeting the budget deficit.
2. Rs. 3.03 trillion (39%) was due to currency depreciation.
3. Rs. 1.02 trillion (13%) is offset by higher cash balances necessary for effective cash management as the government is committed to zero borrowings from State Bank of Pakistan (SBP) in the future.
4. Rs. 0.26 trillion (3%) is the difference between face value (which is used for the recording of debt) and the realized value (which is recorded as a budgetary receipt) of Pakistan Investment Bonds (PIB) issued during the year.

Foreign Exchange Liabilities of State Bank of Pakistan (SBP)

Foreign exchange liabilities of State Bank of Pakistan (SBP) have increased by Rs. 1.09 trillion. These liabilities increased due to foreign currency deposits by different countries and institutions at SBP.

The increase was largely (Rs. 0.73 trillion or 67%) due to increase in foreign currency deposits, a positive development, and partly (Rs. 0.36 trillion or 33%) due to currency depreciation.

Public Sector Entities’ (PSE) Debt

Public sector entities’ (PSE) debt increased by Rs. 0.65 trillion. PSEs borrow in-line with their business plans. The increase was largely (Rs. 0.50 trillion or 77%) due to additional borrowings and partly (Rs. 0.15 trillion or 23%) due to currency depreciation.

Debt for Commodity Operations

Debt for commodity operations decreased by Rs. 0.06 trillion which is positive.

Private Sector’s External Debt

Private sector’s external debt increased by Rs. 0.9 trillion. This is not the government’s liability and is included in total debt and liabilities because of its implications for foreign exchange reserves. The increase was largely (Rs. 0.75 trillion or 83%) due to currency depreciation and partly (Rs. 0.15 trillion or 17%) due to additional borrowings.

In view of the above, out of the total increase of Rs. 10.33 trillion in Total Debt and Liabilities, only Rs 3.44 trillion (33%) has been spent on the financing of fiscal deficit and Rs 0.5 trillion (5%) has been borrowed by PSEs for spending on their financing needs. Retirement of Rs 0.06 trillion (-1%) is a welcome development, whereas an increase of Rs 0.26 trillion (3%) is due to accounting policy relating to long-term bonds.

The increase of Rs. 4.27 trillion (41%) is due to currency depreciation which is a consequence of the wrong exchange rate, industrial, and trade policies of the previous government that led to large and unsustainable current account deficits and ultimately to sharp exchange rate adjustment, explained the Ministry of Finance.

Increases to the extent of Rs. 1.02 trillion (10%) in the government’s cash balances and Rs. 0.73 trillion (7%) in SBP’s foreign exchange liabilities should not be interpreted as debt because these are offset by cash balances of government and liquid assets of SBP, said MoF.

The additional borrowing of Rs. 0.15 trillion (2%) by the private sector from external sources is a healthy sign showing the private sector’s capacity to borrow from abroad for local investments.