Finding the balancing act

If the job of fiscal managers is like that of a tight-rope walker, then for Finance Minister Hafeez Shaikh it is walking a sagging rope.
Less than a month from today, Hafeez Shaikh and the SBP governor Hafiz Kardar pledged, in their request letter to IMF, to extend the stand-by arrangement for a further nine months, that they will achieve the budget deficit target of 4.7 percent of GDP, revised from the original target of 4 percent of GDP to accommodate additional flood-related spending.
This week, the Secretary Finance Dr Waqar Masood says that "serious efforts are under way to contain fiscal deficit below 6 percent" implying that it could also go above six percent, and which, according to Kardar, would mean that the government would have to borrow Rs1 trillion from the banking sector.
The primary bone of contention is of course the RGST. "In pursuit of our programme objectives, we have submitted to the National Assembly the federal part of the legislative package for the reformed General Sales Tax and the provincial part of the package will be submitted to the provincial assemblies shortly," the letter to the IMF said.
If the government really believes it will be able to get the RGST passed through both the assemblies in todays hostile political climate, then really it is living in a fools paradise. Besides, the signature complacency of Pakistani lawmakers dictates that they are unlikely to pass the RGST this fiscal, now that they have the SBA extended till the first quarter FY12.
This means that budgeted Tokyo pledges, some Rs26 billion, and other bilateral commitments might also not materialise, since these are "contingent on the IMFs programme" according to Sakib Sherani former advisor to the Finance Ministry.
The raising of Rs53 billion from the planned Eurobond issue also appears doubtful. "The preparations for the bond issue aren fully underway; and even if we manage to prepare for the sale, the market won be receptive because of the countrys debt situation and the ability to repay," Sherani told BR Research.
These together with the likely revenue shortfall on account of failure to sell 3G licenses (Rs 51bn), means that only the revenue shortfall might equal 1 percent of the GDP. Add to that the expenditure overruns, and that feared full-year deficit comes to more than 7 percent.
So unless, Hafeez and Hafiz have a magic wand up their sleeves they won be able to keep their pledge to contain the gap within 4.7 percent. And on the same note, government borrowing from the central bank will stoke inflation further, than the so-called petrol bomb.