When development gets the axe

The government managed to keep its fiscal deficit in line with the six-month target demanded by the IMF despite non-receipt of Rs42bn from Coalition Support Fund . But that came with an unavoidable high cost.
Budgeted expenditure on public sector development was halved during the first six months, whereas domestic banking resources were wooed away from private borrowers to finance the governments fiscal imbalances.
The non-materialization of foreign flows coupled with lower revenues and higher current expenditure resulted in the axing of development expenditure.
Tax revenues which stood at Rs659 billion in the first half, on annualized basis, are significantly short of budgetary target.
Within the non-tax revenues, the devil of circular debt and government employees compensation schemes squeezed the actual dividend income - mainly from PSEs - by 29 percent on an annualized basis.
This compelled the government to pounce upon the opportunity to book more from SBPs profit by receiving Rs135 billion in the first six months, as against the full-year budget of Rs150 billion.
The government needs to curtail its expenditure, many would say. But this phrase is more of a populous rhetoric, because the difficult times of today do not allow the government to control its expenses by the stipulated amount.
The current expenditures, which already crossed the trillion-rupee-mark in the first six months, over stretched by 20 percent on an annualized basis.
Although, the defence expenditure is within the estimated range, it does not account for all the spending on war on terror including the movement of IDPs. These extraordinary expenses are shown under the head of others in the budget, which stood at Rs134 billion for the first half - well above the full-year allocation of Rs90 billion.
Now under the IMF regime, the only way to keep deficit within limits is to slash development spending. Hence, in the first half, only Rs176 billion was expensed on public sector development as against the full-year budget Rs646 billion - a decline of 46 percent.
Similarly, just Rs49 billion was spent on other development programs, which is 38 percent lower, on annualized basis, from the budgeted amount of Rs157 billion. Since these developments include BISP and ERA, any cut on this spending will seriously jeopardize the plans of poverty eradication and narrowing of the income disparity.
Relief, rehabilitation and reconstruction are a distant dream unless the government curtails its spending and enhances revenues. But for the short to medium term, the answer lies in the influx of foreign money, as the tax reforms, including the implementation of VAT, broadening the tax net and the elimination of tax evasion, may take years before they yield fruits.
So while for the near future, foreign inflows are direly needed to accelerate development spending, they are also required to give breathing space to the domestic borrowers.
The finance ministry budgeted external receipts of Rs510 billion for FY10. However, factually gross external inflows for the first half remained at Rs194 billion (38% of total year budgeted).
The biggest culprit in this shortfall was the non-materialization of Tokyo pledges, as out of Rs145 billion envisaged for FY10, just Rs17 billion flowed in the system in the first half.
Another worrisome fact is that lack of foreign flows shifted the governments financing mix towards domestic avenues, as Rs112 was borrowed from banks in the first six months versus the full-year target of Rs145 billion. With a falling trend in domestic savings, there was little left for private borrowers to rejoice.

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Fiscal            Jul-Dec FY10   % of GDP  Annualized

Position                                     Budgeted

(Rs bn)                                     Shortfall

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Tax Revenue              659        4.38         -13%

Direct taxes             211        1.41         -24%

Indirect taxes           424        2.82         -11%

Sales tax                243        1.61          -6%

PDL                       52        0.34         -15%

Non Tax revenue          251        1.67          -2%

Dividends                 27        0.18         -29%

SBP profit               135        0.90          80%

Current Exp             1059        7.04          25%

General public service   546        3.63          -8%

Defence                  166        1.10          -3%

PSDP                     176        1.17         -46%

Financing                403        2.68

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Source: Ministry of Finance