Wiser fiscal management : Better utilisation of our foreign exchange reserves – by Ali Wahab
Source: Express Tribune
Published: May 2, 2011
Here is a crude fact: the inter-corporate circular debt hovers around Rs200-250 billion. Another fact that we are unwilling to acknowledge is that tax reforms are not moving forward. Forget about direct taxation, the government is even having difficulty enhancing the net of indirect taxes mainly due to taking the reforms public. Some steps announced as early as the last budget speech like capital gains tax have not been implemented. Whenever these facts are raised, everyone passes the buck to talk about corruption in the tax system and focus on agricultural income taxes as a way to move forward. These are for sure the steps to take, but we also have to question ourselves about the prioritization of problems and the proposed solutions. Corruption can’t be eliminated on an immediate basis. Neither those who grease palms nor the ones whose palms get greased, will stop simply because they are told to.
Similarly, long term direct taxation measures will only yield results over a course of time. The problems require immediate attention and simply shouldn’t be allowed to linger.
When everything hits a snag, the government willingly or unwillingly approaches the debt market to meet its pressing obligations. With government debt on the rise, banks find it increasingly difficult to satisfy the demand of the corporate sector, focusing mainly on sovereign lending. The corporate sector pays for the high cost of borrowing and the economy suffers. To top it all, IMF presses us to address the problems affecting us. The government tries to do some reforms but unfortunately hits roadblocks. This is unfortunately the reality of a vicious cycle in which Pakistan has gotten stuck.
If one was to prioritise, the energy crisis should remain on top. The energy crisis finds its roots in two areas: demand/supply gap and inter-corporate circular debt. Demand/Supply gap, again, cannot be eliminated overnight, but the inter-corporate circular debt can. A possible answer lies in utilising our foreign exchange reserves in an effective manner that not only addresses our problems but also keeps the IMF on board. For being part of the IMF program, the foreign exchange reserves are pledged with the IMF. No harm in that because IMF has extended a facility to us that requires a certain discipline to be exercised by the government. During the summer-fall of 2008, we see that because of a flight of capital, we saw our foreign exchange reserves fall to as low as $5.77 billion in October 2008 from a high of $16.62 billion in October 2007. That was a staggering 65 per cent drop, enough to destroy an economy like ours. Since touching that low in October 2008, foreign exchange reserves have steadily grown to $18.21 billion as of March 2011 (SBP figures). During this period, the government has met all its obligations to international creditors and also survived the epic floods of 2010. With $8.7 billion owed to the IMF (SBF figures), we are left with four and half months’ coverage of our import bill of an average of $2.88 billion a month during the current fiscal (SBP figures).
Our savvy finance minister, the petroleum adviser and the bureaucracy need to think out of the box and address the inter-corporate circular debt on a priority basis. Issuing TFCs as reported a few days earlier will not help. We need to plan and present to IMF the advantages of settling the inter-corporate circular debt either in entirety or in a phased-out manner utilising our foreign reserves. Assuming $250 billion to be the inter-corporate circular debt, we are looking to utilise up to $3 billion from our reserves. Naysayers will paint this to be a wrong step and will present all sorts of worst-case scenarios; however, we have to weigh the pros and cons of such an intention.
Some of the positives of using our forex reserves to settle inter-corporate debt
• Exploration companies like OGDC and PPL will be better able to focus on their exploration plans than just crib about the corporate debt as a hindrance
• Refineries, Oil Marketing and Gas Distribution companies will be better able to manage their liquidity and bring down the margins to acceptable levels
• Independent Power Producers shall be inclined to operate at optimal levels, helping increase their production and bring down the crippling power shortages
• As liquidity improves for these companies and better production taking place, the government will be able to better recover taxes. It is simple math: you produce and sell more, the government gets more tax. The corporations earn better profits, hence, higher taxation on incomes
• Government will be able to better manage its obligations and reduce its domestic debt
Published in The Express Tribune, May 2nd, 2011.