The Asian Development Bank has reinforced what many economists in the country already feared: an impending economic fiasco, with fiscal problems leading the way.
The report, titled “Asian Development Outlook 2011”, recalled the fiscal faux pas committed by the country’s government, with the fiscal deficit widening from 5.3 percent of GDP in FY09 to 6.3 percent in FY10.
The decline in tax revenues is largely to be blamed for the deterioration of the fiscal position, with the tax-to-GDP ratio hitting a 30-year low of 9 percent in FY10.
The expenditure side also played its part, with rigid budgetary outlays (interest, security, pension payments) taking up 82 percent of FBR’s tax receipts. The overrun had to be covered via a drop in public sector development programme (PSDP), while loss-making SOEs continued to wreak further havoc.
Another key area warranting particular attention is the debt quandary of Pakistan. While the government’s domestic debt stood at a hefty 37 percent of GDP, external debt was not far behind at 32 percent in FY10.
Debt service payments highlight the gravity of having such a sizeable debt portfolio even more. The heavy interest payments accounted for over 40 percent of FBR’s tax revenue last fiscal year.
As the country trudges along through FY11, it would be idealistic to expect any sweeping improvement, especially since the July-August floods left a deep mark on the country’s economic tell-tales.
The ADB criticised the tax revenue target set at the beginning of FY11 as being a tad unrealistic, even if RGST had been imposed, considering a 26 percent growth in tax receipts was envisaged for FY11 against a 5-year average growth of 14 percent in tax revenues.
With RGST falling prey to political strife, the fiscal front seems to be bracing itself for another doom scenario. A 50 percent increase in government wages, way-higher-than-anticipated power sector subsidies, and energy-related circular debt will maintain the strain on the government’s fiscal wallet.
In such a scenario, PSDP continues to play the role of the scapegoat, with less than 25 percent of the earmarked Rs280 billion in the federal budget made available for PSDP activities in 1HFY11.
And the scarcity of funding sources leads to another economic menace – excessive government borrowing from the banking system. By 12 February 2011, government borrowing from the banking system had gone up to Rs379 billion in FY11, compared to Rs330 billion for FY10 as a whole.
But behold the optimism of the ADB: the bank is expectant of a fiscal recovery in FY12, hopeful that the political environment will sober up to facilitate better revenue generation and fiscal management. Needless to say, there remains a question to the practicality of ADB’s expectations, especially regards the political front.