The federal government’s domestic debt increased by Rs 537 billion in July, reflecting a high level of financial indiscipline, as more money was spent than came in. This means that the failure of the Federal Board of Revenue to collect its targeted Rs 1,554 trillion, falling short by Rs 111 billion, in July and August contributed, but was not the sole reason. This also means a very dangerous situation, where domestic debt servicing will eat up all the revenue of the federal government, leaving it to rely on borrowing for civil and military administration. The failure of the FBR to meet targets does not only mean problems for the federal government, but also for the provincial governments, which receive as their share under the National Finance Commission Award of actual collections, not of the projections made at the time of the Award or at the time of the presentation of the Federal Budget.
The federal and all provincial governments have to face the problem of meeting expenses right at the beginning of the financial year, even if revenue targets are being missed. The gap is filled by ways and means advances, which are borrowings from the State Bank of Pakistan, which basically prints the money needed. The money gets to the banks through open-market operations, and if too much money is printed, it sets off an inflationary cycle. The interest rate is raised to allow the State Bank to absorb excess liquidity, and that is the stage of the cycle we are presently at. One major reason for the crisis is that the governments have had to borrow at 22 percent. Inflation has come down, but the interest rate has not followed. The immediate problem would be the lowering of the interest rate.
However, that will only help in the problem of handling debt servicing. The problem of the incurring of debt will remain. One of the problems with the government going borrowing is that the private sector gets squeezed out. The private sector is already taking a battering because of the interest rate, the same private sector the government looks to grow the economy, provide jobs and pay taxes. The government cannot carry on forever the present mentality, which is based on annual targets. The mentality is based on missing the early monthly targets, either in revenue collection or the borrowing plan, then scrambling to catch up for the rest of the year. That is a surefire formula for missing annual targets too.
