Financing a fiscal deficit of the anticipated 8.8 percent is a daunting task, and the government’s objective of bringing it down by 2.5 percentage points would seem too optimistic without relying on significant amount of additional financing.
Intentions can be judged by the allocation of Rs576 billion for external resources in the Budget 2013-14, which is 50 percent higher than budgeted in the previous fiscal year (2012-13) and more than double the revised figures.
While some expectations from the privatisation proceeds budgeted at Rs79 billion have built up after the Finance Minister’s speech, it is hard to dispel concern over the long backlog of Etisilat land transfer and privatisation receipts.
And while some market veterans see that the failure of timely flows of the privatisation proceeds and programme loans would necessitate the country to enter into an IMF programme, what is more familiar is re-entering the latter to provide some comfort to the international investors and donors.
Saim Ali, an economist at Standard Charted Bank, points out two clear indications of the country heading to the Fund in the near future: with the aim of reducing the fiscal deficit by 2.5 percent and the budgetary allocations of a significant $1.1 billion for programme loans versus only $65 million 2012-13 revised figures, it seems that the government is all set to approach the IMF.
Recall that the country was out of the IMF programme by the end of 2010 after which there have been no significant lending by international agencies and countries.
Though Saim further conceded that the government has a better option of going to relatively inexpensive IMF funding than the expensive Eurobonds, reduction in the spreads of credit default swaps (CDS) and existing Eurobond yields can offer a silver lining.
A big catch in the external resources is the share it makes in financing the deficit. Historically, the country’s fiscal deficit has been primarily financed through internal resources and that too through bank borrowings. Only 1 percent of the fiscal deficit was financed through the revised external resources for 2012-13, whereas 99 percent of it was financed through the domestic resources and that too 80 percent through bank borrowings.
‘The latest target of financing 10 percent of the deficit through foreign flows is wishy-washy’, reckoned Muhammed Sabir, the principal economist at Social Policy and Development Centre (SPDC), while talking to BR Research.
And rightly so, this 10 percent target for 2013-14 includes the Etisilat privatisation proceeds waiting to be materialised since 2006. What Sabir declared as other looming questions were the purpose of Rs99 billion parked in China Safe Deposits and the fate of 3G auction.
With targeted external resources subject to risks, and revenue collection so ambitious, a lot depends on the execution capability and materialisation of external loans, grants and proceeds, failure of which will just exceed domestic bank borrowings all the more.
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