Fiscal deficit to be higher
Credible reports indicate that the government is unlikely to meet its 5.5 percent fiscal deficit target that was revised upward three times during the outgoing fiscal year. The reason for this is two-fold. First and foremost the expected failure of the Federal Board of Revenue (FBR) to meet the extremely optimistic budgeted revenue target of 1952 billion rupees given that to achieve the target would require FBR to collect over 100 billion rupees within the remaining few days before the end of the fiscal year. Speculation is rife that actual revenue collected would, at best, be lower than the budgeted target by at least 52 billion rupees and, at worst, by 100 billion rupees - speculation fuelled by the usual extension on the payment of income/sales tax till the last day of the current fiscal year, 30 June, but unlike in the past, also allowing waiver of penalties, fines and surcharge on outstanding customs duty. What this latter incentive would do to the morale of those who paid their taxes honestly and on time is anyone's guess. One would have hoped that instead of employing means that are perceived as unfair by honest taxpayers or by compelling large taxpayers to pay next year's tax in advance, a practice that is currently under investigation by the Federal Tax Ombudsman, the FBR officials had diligently sought to meet the targets from the first day of the start of the fiscal year. Be that as it may, the revenue shortfall would raise the fiscal deficit estimates by at least 1 to 1.5 percentage points. Expenditure was budgeted at 2.767 trillion rupees for the current year and the revised figure contained in 2012-13 budgetary documents is 3.1 trillion rupees or an increase of 343 billion rupees. In short, a shortfall of over 400 billion rupees is expected which would raise the fiscal deficit to 7.7 to 7.8 percent - higher than the 7.6 percent inherited by the PPP-led government in 2008 when the deficit was rightly defined as unsustainable, leading to a 7.6 billion dollar Stand-By Arrangement (SBA) with the International Monetary Fund (IMF). Those who may argue accurately that the rise in deficit would have serious consequences on the rate of inflation as it would increase reliance on borrowing from the domestic commercial banking sector and from the State Bank of Pakistan as well as print more currency notes yet this would not be the sum total of our economic woes. The foreign exchange reserves are dwindling and this is in spite of a sustained rise in remittance income, with imports rising at a faster rate than our exports that remain hostage to the energy crisis, the law and order problems as well as state borrowing crowding out private sector borrowing. The government has to make scheduled repayments to the IMF for the SBA and it maybe unable to do so until and unless it gets some external assistance. Programme support, or budgetary support, is not forthcoming from multilaterals or bilaterals because of the failure of the government to meet the SBA conditions which accounted for IMF's refusal to extend a Letter of Comfort - a prerequisite for external budget support. At this point in time, a serious deterioration in Pakistan-US relations accounts for no disbursements under the Coalition Support Fund or under the Kerry-Lugar bill. The government has failed to improve governance in major sectors, including energy sector, to the satisfaction of the donors which accounts for a further contraction of disbursements. It is being reported that the IMF is the only entity that would, on even more stringent and politically challenging conditions, agree to a loan that would enable the country to meet its scheduled repayments to external borrowers including the IMF. In short, we may be compelled to borrow to pay back past loans and follow even more stringent loan conditions than before. There really does not appear to be any other solution until of course the government proceeds to slash expenditure mercilessly, not likely given that it is an election year, and raise taxes by implementing tax reforms, which continue to be vetoed in parliament.
Copyright Business Recorder, 2012