MONEY WEEK: Decline in investment and saving affecting growth prospects

''The Budget Strategy Paper 2011-14'' addresses the limitation of fiscal managers to bring the economy back on high growth track, curb inflation, and generate employment. But the solutions are far and few. The most worrisome indicators are the falling trend of investment and savings over the past five years, making future prospects of growth and absorbing rapid increasing labour force dimmer.
Investment-to-GDP ratio from 22 percent in FY06 is expected to be as low as 11.5 percent this year--repercussions of deteriorating law and order situation and chronic power shortfall. This is in sharp contrast to our giant neighbours whose investment-to-GDP ratios are hovering around 40 percent.
The slow growth in real income, if not erosion in purchasing power, is evident from the fact that consumption, which was already at a very high level of 86 percent five years back; is projected to be in mid-nineties. The saving rates are obviously on a downhill journey despite the high interest rates scenario.
No wonder that growth rate is likely to be around 2.8 percent, as compared to targeted 4.5 percent. The fall is partially attributable to the recent floods, but energy shortfall, especially shrinking gas supply to industry, is adding woes to potential growth.
The fiscal deficit seems likely to miss the target again as the revenues are far from target owing to delay in the implementation of reforms; and that is even partially relative to what is sought in budget, and economic slowdown. The federal government is expecting a surplus of 0.6 percent from provinces to make the overall deficit at 5.5 percent. However, if provinces fail to show surplus, the deficit may cross 6 percent.
The initial target of 4 percent was never realistic, even before the floods. In fact, unrealistic and optimist targets seem to be the norm lately. The budget deficit deviated negatively, on average, 21 percent from target in past five years and its slippage is at 28 percent this year, with expected deficit of 5.5 percent--which can be missed as in nine months deficit was at 4.5 percent of GDP.
The government is planning to target budget deficit at 4.5 percent for the next year and to reduce it by 0.5 percent in each year till FY14. This is the right thinking, but it requires both policy, implementation of taxation reforms and doing away with power sector subsidy as expenditures are sticky in nature.
FBR has revised its tax revenue targets to Rs1,588 billion (9.1 percent of GDP) which is again very optimistic. However, economists are of the view that collecting Rs 1,530 billion is realistic. About 27.6 percent growth is required in FY12 to reach target of Rs1,952 billion (9.7 percent of GDP).
Assuming that GDP growth will be about this and inflation will end up at 12 percent, nominal growth of 16 percent will result in tax revenues to reach Rs1,775 billion. Now, FBR seeks Rs 125 billion from additional revenue measures and Rs10 billion from administrative measures. Given the past record, this seems like an uphill task and, even if the revenue target is achieved, the government will be short by Rs 40-50 billion from day one.
While on revenue side, taking 3 G licence budgeted this year to next year may require tough negotiation with loss making cellular companies which are looking for mergers and acquisitions. On subsidy, Rs50 billion allocated for inter-tariff differential appears to be unrealistic and overall subsidy target of Rs 147 may be breached unless tough political reforms are undertaken.
Then there is the whole issue of transferring higher revenues to provinces after 7th NFC Award. And after passing to provinces over 50 percent of revenues left with government are used in debt servicing and that situation is going to be worse in coming years as IMF payments are going to be due from next year.
Now the issue is to pass on the responsibility to provinces after 18th amendment, but provinces are not willing to take the employees of federal government from devolved ministries. That increases the burden of already overstaffed federal government. More on this and debt burden later.
MONEY AGGREGATES
Government borrowing from SBP after receding to Rs 62 billion from start of the year to April 3 is now up on the ladder again as it reached Rs 196 billion in four weeks'' time by April 30. It certainly breached the promise made to the SBP Governor of remaining below the September end level. It will be interesting to see that how SBP takes this issue in upcoming monetary policy review.
For the week ending April 30, there is not much to talk as government borrowing from scheduled banks increased by Rs 17 billion with no significant change in commodity operations or SBP borrowing, credit to private sector marginally declined by Rs 11 billion to reach Rs 157 billion.
Currency in circulation declined further by Rs 25 billion to reach Rs 96 billion for year to date whereas demand and time liabilities increased by Rs 40 billion. Overall, money supply increased by Rs 16 billion to reach Rs 556 billion, or 9.62 percent.
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KEY MONETARY AGGREGATES AS ON APR 30

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                                             Rs (mn)

                                   30-Apr     23-Apr     Change

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Currency in Circulation           195,825    220,578   (24,753)

Total Demand & Time Deposits      356,131    315,339     40,792

Broad Money (M2)                  555,651    539,331     16,320

NFA                               153,156    159,095    (5,939)

NDA                               402,495    380,235     22,260

Net Government Borrowing          342,218    321,798     20,420

Borrowing for budgetary support   472,234    455,472     16,762

from SBP                          196,303    196,447      (144)

from scheduled banks              275,931    259,025     16,906

Commodity operation              (134,236)  (137,600)     3,364

Credit to non-govt sector          83,612    204,551   (20,939)

to private sector                 156,705    167,875   (11,170)

to PSEs                            26,657     36,425    (9,768)

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Source: SBP

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