SUNDAY APRIL 24: $1.3 billion shortfall in external financing

ISLAMABAD: Pakistan faces a shortfall of $1.3 billion in external financing during the current fiscal 2010-11 due to non-compliance with the conditions imposed by the International IMF. Well-placed sources told Business Recorder that during the current fiscal from July-March 2010-11, Pakistan received $1.5 billion that is $1.3 billion less than $2.8 billion it received in the corresponding period last year.
Sources said, "Pakistan is already facing the financial crunch. Its revised fiscal deficit that was 4.7 percent of GDP is being projected to touch even 6 percent of GDP growth. Many foreign donors have been reluctant to provide aid to Pakistan due to a lack of transparency and the fact that the government has delayed the implementation of the structural economic reforms. This is the main reason behind reduction in foreign assistance during the current fiscal," sources informed Business Recorder on condition of anonymity.
Low savings because of current tax-to-GDP ratio pose huge vulnerability to the economy. Pakistan does not have any domestic cushion and every time there are shocks to the economy, the country goes for foreign borrowing either from US or Arab countries. Low taxes mean that the government would not have sufficient resources for investment in social sector required to unlock the potential. Something needs to be done by the economic managers to increase tax-to-GDP ratio, sources further stated. According to these sources, "it has become the need of the hour to eliminate the unfairness in the tax system and to develop political consensus on need to increase the tax to GDP ratio for sustainable development and economic growth".
Asian Development Bank, in its annual report "Asian Development Outlook 2010" has already pointed out that overall fiscal performance fell short of FY2010 budget targets. Planned policy reforms lost momentum as pressures on foreign reserves eased and calls for higher spending increased. The fiscal deficit at 6.3% of GDP was substantially higher than the 5.3% of GDP outcome in FY2009 and the deficit target of 5.1% of GDP (Figure 3.7.4). Even though the Public Sector Development Programme was slashed by a fifth to 3.5% of GDP, this cut was insufficient to offset increased outlays for security, subsidies, and transfers to provincial governments.
The study says that the expectations regarding pledges made by the Friends of Democratic Pakistan in Tokyo in April 2009 have been revised downward in face of the slower than expected pace of disbursements in FY2010. External support in response to flood-related damage will contribute to higher increases in development spending with the magnitude of the increase for FY2011, among other factors, to be determined also by the absorptive capacity of the economy.
Due to delay in the implementation of macroeconomic structural reforms, the fifth review, originally scheduled to take place before end-September 2010, has remained stalled so far and that is the major reason behind the lack of foreign assistance to Pakistan. The structural benchmarks on implementing a value added tax on July 1, 2010 and end-June 2010 performance criteria on general budget deficit and government borrowing from the central bank were missed. Subsequently, the economic conditions deteriorated markedly as a result of the floods, requiring significant amendments to the 2010/11 budget. Corrective actions needed to complete the fifth review could thus not be implemented before the expiry of the SBA.