Byline: Khurram Husain
IT was a careening year for the economy. At the start of 2019 there was mounting anticipation around the future direction the government was going to adopt as the foreign exchange reserves continued to slide, borrowing from 'friendly countries' was in full swing, the IMF negotiations were not moving forward and an announcement of a 'mini budget' had been made for later in the month. Confusion prevailed as the market looked for hopeful signs of forceful steps to be taken to control a runaway fiscal deficit that was being plugged with borrowings from the State Bank of Pakistan since banks were also refusing to lend to government despite massive interest rate hikes.
Read: Getting down to business in 2019: Highlights from Pakistan's economic year
In short, the financial markets were stalled as they awaited a decision by the government on how it was going to tackle the twin deficits - fiscal and external. By the time the fiscal year ended, the government had put out among the worst fiscal numbers ever seen in Pakistan's history, with zero growth in revenue collection and the highest ever fiscal deficit equal to 8.9 per cent of GDP. On the external side, the continuous declines in the foreign exchange reserves continued making it necessary for the country to borrow up to $5 billion from Saudi Arabia and the UAE in short-term deposits.
On the domestic side, the situation was even more dire. When the government entered office, the total stock of domestic debt was around Rs9 trillion, of which around Rs3tr was borrowed from the State Bank of Pakistan, meaning it was money that was printed to help pay government bills. By January and February, the stock of domestic debt touched Rs11tr, with almost Rs7.5tr of it borrowed from the State Bank. In proportional terms, borrowing from the State Bank accounted for around one-third of total domestic debt in July, 2018, and by early 2019, this proportion had crossed two-thirds.
This massive monetisation of the deficit became one of the biggest reasons for high inflation, which began its relentless climb in early 2019, and the external borrowing entangled the country in the geopolitical preferences of its creditors - the Gulf Arabs. Yet at the start of 2019, then finance minister Asad Umar preferred to talk of a 'home-grown' package of economic reforms to meet the challenges of the twin deficits, and spoke as if the period of adjustment was already over, pointing out that larger borrowing...