Fiscal Policy Statement 2010-11: avoid additional strains on budgetary resources

With international price of oil rising, the government must maintain its market base pricing policy for POL products and avoid additional strains on limited budgetary resources as well as take corrective measures to augment foreign currency inflows, says Fiscal Policy Statement 2010-11 released here on Tuesday.
It suggested that there was need to re-orient policy towards resource management. Successful resource management, as opposed to adjustments made in response to crises, will play a fundamental role in addressing structural weaknesses of the economy. Such policy orientation will also limit the need for adjustments in times of distress as these adjustments pose serious implications for investment-hungry infrastructure bottlenecks.
Fiscal Policy Statement prepared by the Debt Co-ordination Office of the Ministry of Finance stated that Pakistan''s fiscal deficit increased to 6.3 percent of GDP in FY10 against the budgeted target of 4.9 percent whereas fiscal deficit for FY09 was 5.3 percent. Lower revenue collection and higher than budgeted expenditure on security and subsidies were the main reasons for this undesirable increase in fiscal deficit. Developments during FY10 reversed the macroeconomic consolidation achieved in the last fiscal year.
Revenue collection remained weak throughout the year. Pakistan''s tax-to-GDP ratio has slightly improved to 10.0 percent of GDP in FY10 compared to 9.5 percent in FY09, though still lower than desired. Growth in real revenues is a prerequisite to successful implementation of the government''s socio-economic targets. The performance of Pakistan''s revenue collection in real terms has been weak at best ie 2.0 percent in the fiscal year 2009-10. Furthermore, real growth of 7.9 percent in expenditure has been higher than the real growth of revenues which has had significant consequences for the fiscal deficit. Persistent divergence between growth of revenues and expenditure has led to escalating revenue deficit to the tune of 2.1 percent of GDP. The primary balance also remains in deficit by 2.0 percent of GDP. Going forward, significant growth in real revenues is essential to maintain fiscal sustainability, and to finance the government''s economic plans.
In last three fiscal years Pakistan''s fiscal deficit has averaged 6.4 percent of GDP, which resulted in declining national savings and investments in the economy, jeopardising the economic and social stability of the country. FY10 was the third consecutive year of double-digit inflation and higher fiscal deficits have contributed towards this rise. The energy shortages and security concerns have considerably reduced the non-debt creating external flows; fortunately a sharp narrowing of current account deficit has deferred the pressure on balance of payment in the presence of higher deficits.
Increase in commodity prices in the wake of global economic recovery and drying external finance account flows will pose serious risk to external account sustainability of the country. The fiscal policy must balance the need to support a still fragile economic recovery and the potential for financial stress, underscoring the criticality firm dedication to credible strategies that lower fiscal deficits over time where funding pressures are present or seem imminent, supported by upfront measures.
Fiscal policy should explore opportunities for augmenting the resource envelop rather than cutting expenses. At the same time, expenditure should be rationalised and non-productive outlays should be curtailed that will bring improvement in the national investment climate, saving incentives and opportunities, and competitiveness of the real economy. Institutionalisation of policy co-ordination cannot be overemphasised for growth and sustainability of national economy.
The pool of national savings must be enhanced, allowing for required investments to be made without putting the government''s fiscal position at risk. Positive real interest rates are essential as they will attract substantial funds currently outside the purview of the official monetary system. Moreover, budgetary borrowing options need to be revisited to ensure that financing of future deficits does not dilute monetary policy''s efforts to keep money supply in check and tackle inflation.
These public sector entities'' losses must be tackled by comprehensive restructuring and introduction of corporate management structures, rather than absorbing their liabilities into the government budget. In essence, encouragement to explore and develop alternate financing mechanism is a viable solution to this problem. Increasing the capacity for financial management as well as ensuring private sector participation will allow for cost-efficient access to funds to cover the obligations of the PSEs, as well as to finance infrastructure upgrades.
For Pakistan, a daunting fiscal challenge lies ahead, particularly after the recent devastating floods that have left the policy makers with little options to undertake crucial fiscal adjustment measures. Put it another way, a balancing act lies ahead for fiscal policy in creating fiscal space while meeting new demands on the budget. The focus for creating fiscal space should be on revenue mobilisation and optimisation of the composition of budgetary expenditure by reprioritising public expenditure, improving the efficiency of spending, as well as reforms which could help limit future fiscal pressures.