Fiscal deficit: agenda in extraordinary times

A top-line report in a reputable newspaper on 24th February, 2011 that President Zardari took an unannounced trip to Dubai for a couple of hours to seek the intervention of the UAE leadership for the payment of dollar 800 million that Etisalat owed to Islamabad for the purchase of Pakistan Telecommunications Company Limited (PTCL), shows the desperation of the government to put the existing IMF programme back on track.
The authorities of the country hope that the receipt of this amount, along with two other major steps in raising another dollar 1 billion from the sale of other assets and mobilising about Rs 46 billion from new tax measures - will strengthen Pakistan's case in securing a positive nod from the IMF. For raising dollar 1 billion, the authorities plan to disinvest government shares in state-owned entities such as OGDCL, Islamabad Electric Supply Company, Habib Bank Limited and Kot Addu Thermal Power Company while the proposed new tax measures would include a 15 percent flood surcharge on withholding tax and a hike in the excise duty on imports from one percent to 2.5 percent. Rs 5 billion would be generated by broadening the tax base and the recovery of arrears.
In addition, Islamabad has asked the provincial governments to provide a minimum of about Rs 100 billion as cash surplus during the current year out of the Rs 300 billion additional transfers made under the 7th NFC award. With all these measures, the government hopes to contain the fiscal deficit at about five percent of the GDP against the revised IMF target of 4.7 percent. According to reliable sources, details of these measures were shared with the PML-N's parliamentary team led by Senator Ishaq Dar during the recent talks on economic reforms and these were "well-received".
Although most of the people may find such an unprecedented visit of the President to a foreign country surprising but, honestly speaking, it seems to have been forced on the country by the gravity of the unfolding economic situation. The present programme with the IMF has been put on hold to allow some time to the Pakistani authorities to come up with some firm revenue generating proposals in order to contain the fiscal deficit within reasonable level. Obviously, if no extraordinary efforts were made to raise revenues from all the conceivable sources, the budget deficit during FY11 was expected to touch a very high level of about 8.4 percent of GDP, which would have been totally unacceptable to the Fund and the presently suspended SBA would have been derailed. This could have serious implications for the economy and tarnished the image of the present government for its failure to meet the conditionalities agreed earlier with the IMF.
It may be mentioned that multilateral institutions like the World Bank and ADB have already asked the government to secure a letter of comfort from the IMF before they resume their financial flows to the country. Foreign investors and other donors would also lose their confidence in the ability of the government to pursue a reform agenda vigorously. In short, if the present programme with the Fund is discontinued, the balance of payments of the country could again come under pressure, the exchange rate of the rupee could depreciate, the rate of inflation could accelerate and the credit rating of the country could be downgraded further.
Those who think that the present level of foreign exchange reserves was adequate enough to adopt an inflexible attitude and say goodbye to the Fund could be proven wrong within a few months. The reported bold step taken by Zardari to visit the UAE was primarily meant to pre-empt such a scenario. While we can feel the need of such an initiative, it could also be argued that the government should have first strived hard on its own to facilitate the transfer of some land titles to Etisalat, which was the basic reason for the non-payment of about dollar 800 million, out of the dollar 2.8 billion PTCL's privatisation proceeds so that the dispute should have been settled automatically, and without the intervention of the highest authorities of the UAE and Pakistan.
It also needs to be noted that the insistence of the IMF to contain the budget deficit within specified limit and pursue other reform measures is not without sound economic reasons. Obviously, if the fiscal deficit is allowed to rise and no worthwhile measures are taken to control it below 5 percent or so of GDP, inflation would hit the country with a renewed vigour, the exchange rate of the rupee would depreciate further, the rising trend of interest rates would continue, private sector credit would be crowded out, the economy could stagnate and there would be no hope for a rise in employment or reduction in poverty. It is, therefore, definitely in our own long-term interest to mobilise higher level of resources and prune expenditures for stabilising the economy.
In fact, it should be the authorities of the country themselves who should be following such a course of action rather than be guided or forced by the dictates of the IMF. At the moment, it seems that the government, as indicated by President Zardari's foreign visit, is very sincere in its efforts to contain the fiscal deficit within limits agreeable to the IMF by taking a variety of measures. We can only hope that the opposition parties would also play a positive role by cooperating with the government or suggesting some viable alternatives for the long-term economic interest of the country at this critical juncture.