IMFs comfort for fiscal cushion

A one-off high receipt from the Coalition Support Fund ($760 mn), earlier transfers of SBP profits, and possibly some accounting gimmicks to show subsidies of power and other sectors in contingent liabilities, made it possible for fiscal managers to post a budget deficit at 1.3 percent of GDP for the second quarter.
Traditionally, fiscal deficit for the first half of a fiscal year turns out to be 40 percent of the full-year deficit. By taking this into account 2.9 percent of GDP for the first half can translate into full-year deficit of 7.5 percent, as against the central banks projection of 6-6.5 percent. No wonder, when voices within the government said they expected a gap of 8-8.5 percent, they had some sound reasoning behind it.
Nonetheless, the fiscal managers have taken a U-turn and are reportedly going to plea a case of 5.5-6 percent to IMF in upcoming talks. They are presenting the case on the premise of generating additional Rs46 billion in tax revenues on the back of floods surcharge and higher special excite duty in the last four months.
Under the tough political clout, the past performance of current regime casts doubt on the materialisation of new measures. And even if implemented, these steps would only reduce the deficit by 0.3 percent of GDP.
The generation of Rs35 billion from the Petroleum Levy in the first half is not likely to be matched in the latter. The levy collection was very low in Jan-Feb and the decision of virtually reducing it to half of the targeted amount in March will put more strain on tax revenues. Some circles, in fact, fear that political pressures will force the government to reverse its decision again - and thereby adding further pressure on its kitty.
The subsidy on power tariff differential which was budgeted at Rs30 billion for the full-year is, according to the government, going to cost Rs60 billion just for the last four months of the fiscal year. A similar per month number can be assumed for the first eight months as well. In the absence of detailed numbers, there are fears that the government may be putting this subsidy in contingent liabilities for the time being.
Even by putting aside the assumptions and forecasts, the deficit financing pattern of the first half, especially the second quarter, has its own challenges. External financing is far and few - net external flows were at a negative Rs10 billion for the Oct-Dec period.
Within internal flows, non-bank flows were two-thirds of that in the first quarter. With the onus of financing falling more and more on domestic sources, Rs286 billion were raised in 1HFY11, which is 2.7 times of what was provided in the corresponding period last year. Inflationary expectations and crowding out of private sector, therefore, is no surprise.
The burden of containing fiscal deficit has been falling on development spending, hurting future growth and poverty alleviation programs. PSDP was at Rs125 billion for July-December against the full year budgeted target of Rs663 billion. And the second half is likely to be worse.
The government has initiated talks with the IMF on its release of next tranche of $1.7 billion. Although this tranche will be solely for balance-of-payment support, it has some indirect fiscal implications.
One, the inflow will help economic managers push political leadership on economic reforms including RGST. And, two, the fact that other donors, including multilateral agencies, have linked their development support to IMFs nod means one can at least hope for additional foreign inflows once IMF finds comfort.