Clarification - Reference News item published in the newspaper titled "Pakistan's external debt estimated at $130b by FY23"

This is with reference to the news item published in the newspaper “Express Tribune" titled “Pakistan’s external debt estimated at $130b by FY23” dated 10.07.2017. The article’s commentary is based upon external debt and liabilities and comments regarding external public debt are as under:

The news report used exaggerated statements and drew baseless conclusions with the intention to create sensation and mislead the general public. The news item has quoted that as per International Monetary Fund (IMF) External Debt is estimated to reach US$ 130 billion by fiscal year 2022/23 with a net addition of $34.6 billion during the tenure of the present Government from US$ 95.4 billion in FY2017/18.

The news is referring to External Debt and Liabilities (EDL) of the country which includes private sector debt, debt of banks etc. in addition to the external public debt. Time and again it has been clarified that EDL does not constitute borrowing of the Government since it includes borrowing of PSEs, liabilities of the central bank, borrowing of banks and of the private sector.

Clarification - Ministry of Finance issued a clarification

In order to bring clarity about the budget and expenditure figures for Prime Minister Office, Finance Division presents following facts, with a view to address certain misconceptions in Media

• During the Current Financial Year 2018-19, PM Office had a budgetary allocation of Rs. 986 million. However, owing to ongoing austerity drive and with a view to set the example from the top, PM Office has successfully managed to squeeze its expenditures up to Rs. 675 million, which is 32% reduction that is unprecedented.

•  Further analysis reflects that the expenditure of PM Office (Public) has been curtailed from Rs. 514 million (budgeted) to Rs. 305 million (actual till end June), thereby reflecting the saving of 41%.

• Similarly, PM Office (Internal) brought down its expenditures up to Rs. 370 million, against the budgetary allocation of Rs. 472 million, which reflects the expenditure squeeze of 22%.

• To achieve this goal of expenditure rationalization and austerity, PM Office slashed 35% HR and massively reduced expenditure on refreshments, fuels, Procurement of Equipments and Machinery and adoption of a basic economical non lavish style of official working.

• The budgetary allocation for PM Office (Public + Internal) for next financial year 2019-20 is Rs. 862.9 million which is again 12% less than budgetary allocation for FY 2018-19. In spite of rising inflation, increase in salaries and demand for replacements of physical assets and refurbishment etc, budgetary allocations for PM Office have been kept to bare minimum levels, to set an example for other Federal Ministries / Divisions & Departments.

• For further clarity, it is informed that the Printed Budget for PM Office has been reflected in the Volume-I of Federal Budget 2019-20 (Current Expenditure). The relevant pages are 302-310.

•  Electronic Media has been flashing page 302 of this book which reflects the PM Office Budget worth Rs. 1172 million for financial year 2019-20 against the existing budgetary allocation of Rs. 986 million for FY. 2018-19. As elaborated in the table, the PM Office budget of Rs. 1172 million also includes the budgetary allocation (Rs. 309 million) for National Disaster Management Authority (NDMA). NDMA, although autonomous with its own budget line has been parked under the PM Office. Previously it was under the Ministry of Climate Change. Hence, the budget of NDMA must not be and should not be confused with the distinct budget items of PM Office. Data table may be referred for more clarity on this.

• For purpose of budget preparation, revised budget estimates comprise of 8 months actual expenditure plus 4 months anticipated expenditures. The budget book page No. 302 reflects revised estimate of Rs. 820 million against the budget of Rs. 986 million for the PM Office. However, PM office went through further belt tightening and has successfully been able to close the financial year at an actual expenditure of approximately Rs. 675 million which is even 18% lesser than the revised expenditure estimates.

• The budgetary allocation for PM Office for next financial year 2019-20 is approximately Rs. 863 million which is 12% lesser than budget allocation for FY 2018-19. This existing spending level of PM Office (Rs 675 million) is actually touching the expenditure levels in FY 2014-15, which speaks volumes about the austerity drive in the PM office.

In nutshell, Finance Division clarifies that PM office has actually reduced its expenditure by 32% during the CFY 2018-19. Its next year budgetary allocation is 12% less than the budget for 2018-19. The coordinated effort to bring austerity through rationalization of current federal expenditures would continue in future under the high standards set by the PM Office, based on the PM’s vision of cutting down expenditures.

Following is the complete budget analysis of the Prime Minister Office:-

Prime Minister’s Office
Budget & Expenditure Analysis
(2018-19)

Clarification - that the Federal Government has neither reduced nor delayed the transfer of funds to any of the provinces

Ministry of Finance, in response to various news reports to this effect, clarifies that the Federal Government has neither reduced nor delayed the transfer of funds to any of the provinces. All the provinces have been receiving their share in the Federal Transfers in accordance with the NFC Award. The Federal Government makes these transfers, fortnightly, on the same day of reporting of the collections by the collecting agencies (i.e. Federal Board of Revenue and Petroleum Division). Any shortfall in revenue collections results in a uniform change in the share of the Federation and the provinces in the Federal Transfers.

The Ministry further clarifies that the government of Sindh has received Rs. 441.8 billion, as federal transfers, during the first three quarters (July – March 2018–19) of the current fiscal year compared to Rs. 418.1 billion during the corresponding period of the last fiscal year entailing a 5.7% increase i.e. Rs. 23.7 billion higher than the last year.

Clarification - Ministry of Finance strongly refuted the impression created by certain statements by representatives of Government of Sindh that there is delay in transfer of resources from the Federal Government to the Provinces

The Ministry of Finance strongly refutes the impression created by certain statements by representatives of Government of Sindh that there is delay in transfer of resources from the Federal Government to the Provinces. It needs to be noted that FBR reports revenue collection to Finance Division twice a month (on 17th and last working day of the month). The shares of the provinces are transferred on the same date as per the NFC formula. No amounts are withheld by Finance Division.

During the first 8 months of the current financial year an amount of Rs.312.2 billion has been provided to Sindh as part of its share in the collected revenue. In addition an amount of Rs.57.5 billion has been provided as arrears for the last year. Overall, the Government of Sindh has received Rs.27.1 billion more during the current financial year (July 2018 - February 2019) compared to the same period of last year.

Clarification - A report in a section of media contends that Government has borrowed Rs 2.9 trln in just 7 months to finance budget deficit

A report in a section of media contends that Government has borrowed Rs 2.9 trln in just 7 months to finance budget deficit.

 For sake of clarity it is important to comprehend that the increase in debt stock cannot be termed as borrowing of the government. 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. In this regard, following facts are worth noting:

• In US Dollar terms, central government external debt increased from US$ 64.1billion at end June 2018 to US$ 65.8 billion at end January 2019. Therefore, an increase of around US$ 1.7 billion was recorded in central government external debt during first seven months of current fiscal year compared with the increase of US$ 5.9 billion during the same period last year. In rupee terms, central government external debt amounting US$ 65.8 billion becomes equivalent to Rs9,096 billion at an exchange rate of PKR138.2553/US Dollar. Therefore, the value of central government 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 end 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 to 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. In fact, 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.

Rejoinder - Federal government's borrowing from the State Bank of Pakistan (SBP) hit a high of Rs 6.6 trillion

An opinion piece in a section of print media on 27th January said the federal government’s borrowing from the State Bank of Pakistan (SBP) hit a high of Rs 6.6 trillion. It adds that the government has been borrowing at an average of Rs 15 billion a day for the past five months, that the budget deficit will hit a high mark and huge losses in PSEs. The opinion piece needs clarification on certain accounts to present the true point of view based on data and factual actions undertaken by the Government over the last several months.

Based on preliminary estimates, Government borrowing from SBP during July-December, 2018 was at Rs 1.2 trillion. Figures reported in the article at Rs 6.6 trillion is not correct and misleading. It is also important to note that due anticipation of increase in interest policy rate borrowing from scheduled banks was in negative at Rs (-) Rs 702 billion. A net bank  borrowing during July- December, 2018 was Rs 496 billion.  However, in the light of stability in the policy interest rate scheduled Banks have started a reasonable participation in government security auctions. It is projected that increased  borrowing from banks will substitute in lowering borrowing from SBP in the coming months.

There is a need to understand the difference between increase in debt stock and actual borrowing of the government. The writer has been quoting a highly misleading number of  Rs 15 billion a day for the past five months. He misquoted increase in debt stock as borrowing of the government i.e. devaluation impact due to depreciation of Pak Rupee against US Dollar has contributed significantly towards increase in debt stock of the government during first five months of current fiscal year. In fact, this devaluation impact was more than actual borrowing of the government.

The writer has appreciated the measures announced by the Government in the investment and promotion package of January 2019 in consultation with all the major stakeholders. This package has been announced to ease the cost of doing business in Pakistan, reverse the trends of de-industrialisation and support exports. All this is intended for job creation and enlarged social sector production for reducing poverty in the country.

The writer has correctly highlighted that the tax incentives announced in the Package would help to ‘direct additional credit towards three important sectors of the economy: small and medium-sized enterprises (SMEs), the agricultural sector, and the low-income housing sector’.

The writer is correct that the measures ‘will encourage savings, investments and, at the same time, compress the demand for imported luxury items’.   

The reforms package announced by the Government is a continuation of the measures already announced earlier, like reduction in electricity and gas prices. The package is also focussed on reducing external imbalance, a legacy of ineffective policies of the last decade.

The Government has initiated measures on austerity, reducing tax evasion and monetary and exchange rate measures. The shortfall of Rs 170bn in FBR tax collection in first six months of FY19 is primarily due to reduction in GST on petroleum products to shield domestic consumers from rising international oil prices. 

The measures to shield domestic consumers and especially the poorest and most vulnerable households have started to yield results and CPI inflation has declined for two consecutive months to 6.2% in December 2018, down from 6.8% in October 2018. More importantly, food price inflation has declined to just 0.9% in December 2018, compared to 3.3% in August, when the PTI government came to office. In the coming days further measures will be taken to provide relief to the poorest and most vulnerable households.

The most critical challenge facing the new government was to avert a balance of payment crisis. Due to tireless efforts of the Government, success has been achieved with significant investment and financial assistance from bilateral partners including Saudi Arabia, UAE and China. The Government has finalised a facility of trade finance for oil with the ITFC. Facility for oil on deferred payment has been finalised with Saudi Arabia and shall be operationalised soon. This will help improve Balance of Payments in the country.

These measures have started to restore confidence. Credit Default Swaps (CDS) has declined in January, making Pakistan US$ bonds the best performing bonds in the Emerging Asia markets. Similarly, the high participation in the PIB auction on 23rd January with a bid over Rs 344bn, shows improving sentiment locally, which will help reduce reliance on SBP borrowing This, will help government reduce reliance on SBP for deficit financing, a risk highlighted by the writer.

Prudent monetary policy stance by the State Bank of Pakistan is ensuring that inflation remains well anchored. The effect of such a policy is to protect the common man. At the same time, securing enough food supplies in the country has ensured that food inflation remains at the lowest. Expenditure management has been such where aggregate demand in the country has been managed to arrest the rising inflation and its effect on the current account.

It is a misplaced contention that the budget deficit, which is projected at 5.6%, will grow to 10%. The budgetary deficit is being very much managed by ensuring that the target of overall revenues including FBR and non-tax revenue for the year are met. The quasi-fiscal losses are being handled.  The Government has already taken key measure to reduce the build-up of circular debt and the focus has not only been towards rationalization of prices but the plan of reducing losses, past recovery and a host of efficiency measures which are already in place and are showing results.

Growth maybe subdued in the immediate but will be broad based and financed through raising domestic savings and investment. Evidence for the first 6 month shows that the private sector in Pakistan both for working capital and for fixed investment has domestically borrowed around Rs 500 billion compared to Rs 230 billion in the first 6 months last year and the agriculture sector credit has shown a growth of 22% in the first 6 months. Therefore, the allegation that economic growth is dropping does not appear to be based on evidence that is presented in the first 6 months. 

The statement that expenditure is out of control is also not correct. Expenditure growth is very much in control. Pakistanis are not being burdened by any amount that is being said by the author. Total provisional expenditure for first six months of  current FY were marginally higher on account of interest payment, security and other spending. Interest payments during the year 2018-19 would be higher owing to increase in interest rates and exchange rate. In the budget total interest payments (on domestic & foreign debt) was estimated at Rs 1.6 trillion which is expected to increase from this amount but not as much as contended by the writer. For other expenditures the present government has abolish all discretionary allocations of the President and the Prime Minister. Further a 10% cut has been imposed on current expenditure. However, no cut has been imposed on security related expenditure.

Comment - on news report appeared in Dawn on 20th January 2019

In response to a news report in Dawn on 20th January: "FBR fails to recover Rs 170 bn in fraud cases", it is stated that the Directorate General of Intelligence and Investigation of Inland Revenue is FBRs premier anti tax fraud agency. It undertakes surveillance activities and after getting verification from the record it prepares a contravention report which is sent to field formations ( LTUs & RTOs) for adjudication and recoveries. 

The field formations examine the record and issue notices to taxpayers for their response. In almost 90% of the cases adjudication is quite close to contravention report however in few cases the explanation of taxpayer is found correct and the issue is dropped after consulting the Intelligence Directorate. In most of the cases, the taxpayers opts to approach the high courts to delay the impending demands. Because of these issues average time of finalization of such cases varies between one to four years. 

The I&I reports are a continuous feature of working of FBR and the number of cases and the associated revenues keep on changing on month to month basis.

The progress in all such cases is closely monitored by FBR at the very highest level and it's very difficult for any lower functionary to misuse this information. 

Moreover any complaint regarding any compromise on I&I cases are very seriously viewed by the Chairman and FBR has zero tolerance for any such compromise.

Rebuttal - Position on transfers made to Sindh

Ministry of Finance strongly refutes news reports/statement which claim that the Federal Government has made less transfers to Sindh during the current financial year. 
It is clarified that during the first half of FY 2017-18, FBR reported a collection of Rs.1845.3 billion (inclusive of arrears of previous year). During the same period of current financial year, FBR reported collection of Taxes as Rs.2,011.4 billion (inclusive of arrears of previous year). 

The share transferred to Sindh province during the same period of last financial year was Rs.251.5 billion and during the current financial year it is Rs.275.2 billion showing a growth of 9.4%. 

Response - Claim on Pakistan's international reserves dismissed as misleading

The Ministry of Finance dismisses as misleading, the claim appearing in a section of the press on 6th January 2019 that Pakistan’s international reserves are at the lowest point ever in recent history.

Any argument regarding international reserves position cannot be grounded merely on ‘net international reserves’ position. Instruments such as forward swaps and balance of payment support are used by central banks and governments all over the world to strengthen their international reserves position.

Response - to News Report about APG's visit to Pakistan

The news report published today in a section of press on Pakistan’s FATF and APG issues is not based on facts. 

It may be noted that Pakistan is passing through two separate processes, one is FATF Action Plan and another is regular assessment of AML/CFT regime.

The FATF Action Plan has been agreed with FATF and is being implemented with timelines from Jan-2019 till September 2019. Its progress is being monitored by FATF on quarterly basis. The focus of this action plan is on the implementation of TF regime in Pakistan.

The regular APG assessment is part of Pakistan’s APG membership requirements and every country in the globe is required to undergo assessment of anti-money laundering and combating the financing of terrorism (AML/CFT) framework. 

Pakistan’s assessment is being conducted by APG and assessment team from China, Turkey, UK, USA, Indonesia and Maldives. The purpose of the assessment is to gauge the level of compliance on key AML/CFT areas including adequacy and effectiveness of laws, policies and coordination, implementation of preventive measures, powers and capacity of FMU, supervisory and law enforcement agencies, use of financial intelligence and international cooperation. During the onsite visit (8-19 October 2018) to Pakistan, the APG assessment team held meetings with all Pakistan’s AML/CFT stakeholders. This process will culminate in July 2019 in APG’s annual meeting and in between draft reports would be exchanged with APG including one face to face meeting in April 2019. Both processes i.e. FATF Action Plan and APG’s mutual evaluation are distinct and may not be mixed while reporting in press.

It is pertinent to mention that all countries undergo regular mutual evaluation process using a global assessment methodology and procedures. As of date the AML/CFT assessments of 60 countries have been completed across the globe out of which 16 countries are the members of APG. It is the third mutual evaluation of Pakistan the first two were held in 2004 and 2009 respectively.

It is also clarified that APG assessment team headed by APG’s Executive Secretary Mr. Gordon Hook held a courtesy meeting with Finance Minister and discussed Pakistan’s overall AML/CFT regime. The Finance Minister during the meeting with APG team assured Pakistan’s strong commitment for a robust AML/CFT regime as per international standards and highlighted Pakistan’s measures on this front. The APG team also did not share any assessment in written or verbal forms whether Pakistan will continue to remain on FATF Gray list or not.