The government has released the budgetary financing operations (federal and provincial) report for July-June 2019-20, according to which there was a substantial rise in non-tax revenue, from the budgeted Rs894.4 billion to Rs1.296 trillion in budget documents and Rs1.524 trillion in the recently released consolidated budget operations data. The improvement in the revenue collection is due to an increase in State Bank of Pakistan profits, from the budgeted Rs406 billion to Rs785 billion in the revised estimates as per the budget documents and a little under a trillion rupees ‑ Rs935,519 billion ‑ as per the consolidated statement.
The SBP profits in the revised estimates as per the budgeted projection rose by 130 percent; and again by 19 percent in the consolidated budget operations data in comparison to the revised estimates made in the budget presented to the parliament about two months ago. However, experts question the rise in the SBP profits, as worldwide central banks show profits just by making book entries, which invariably lead to an increase in the money supply and through it a hike in the inflation rate. It is also known that good central banks, which are expected to keep inflation at a low and stable level, do not target for profits but allow profits to arise in their normal monetary policy operations. By the same token, if a central bank has increased its profit levels through its domestic operations, it means that the particular central bank has caused inflation in the economy by expanding its asset base and it is not a good barometer of evaluating the performance of a central bank.
Past records show that Pakistani governments traditionally rely on borrowing from the SBP, barring years when the country was on an International Monetary Fund (IMF) programme as the Fund’s standard policy matrix includes zero borrowing from the central bank. Thus, the government did not borrow from the SBP while it was on a three-year Stand-By Arrangement (2008), a three-year Extended Fund Facility (EFF) programme (2013) and, at present, in the 39-month EFF programme (2019). But the incumbent government used the source just before going on the Fund programme. Ironically, while the SBP insisted on a prohibitively high discount rate, 13.25 percent, that choked off all economic activity, it was fuelling inflation through its profits.
As we know, there is always considerable political pressure to show higher non-tax revenue with higher SBP profits, which is a relatively easy option. The IMF, which guides policy decisions in Pakistan today, in a recent working paper, said, “In developing countries, central bank financing to the government may be warranted in the short run. In these countries, government revenues exhibit seasonal fluctuations and capital markets are shallow, thus making the case for allowing central bank financing in the short run, via overdrafts or through advances to smooth out seasonal revenue fluctuations. The design of a good institutional arrangement for government borrowing from the central bank is not independent of the country’s exchange rate regime. While banning central bank lending to the government is as critical as an anti-inflation policy stance, economies with conventional pegs and intermediate exchange rate regimes (exchange rate bands) should be even more compelled to endorse this principle. Exchange rate targeting countries are particularly vulnerable to a large financing of fiscal deficits, as the increasing money supply can drain central bank international reserves, which, eventually, may lead to a costly balance of payment crisis.”
As if existing financing problems were not enough, the corona epidemic further complicated matters. Lower revenue in the current year is being attributed entirely to the coronavirus; however, the unrealistic Rs5.5 trillion target agreed on 12 May 2019, by the then newly-inducted economic team leaders with the IMF as well as the choking off of economic activity due to the contractionary monetary policy during 2019-20, are no less to blame for the situation.
The PTI government keeps claiming successes on the economic front, but the truth is that the economy faces many difficult challenges. The rise in revenue is only a small feat. The bigger problems staring us in the face include continuing high prices and rising unemployment made worse by the corona lockdown. The common man is in dire straits as the cost of living has risen tremendously over the last two years, while earning opportunities have shrunk. No surprise that the poverty graph has gone upwards.
No doubt, the government has made brave efforts to provide relief to the most vulnerable sections of people, but this operation is no substitute for a general upturn in the economic situation as a whole. For it, sound planning and efficient and timely completion of development projects should be the top priority of the government.