Comments: Dr Sheikh won't find many takers

One word describes the federal budget for fiscal 2011-12: 'unrealistic' in terms of the forthcoming year's expenditure allocations and revenue generation. The overall fiscal deficit is estimated at 851 billion rupees or 4 percent of the GDP.
This target is post May 17, subsequent to the meeting between the International Monetary Fund (IMF) staff and the Pakistan economic team in Dubai, during which the government's proposal to contain the deficit at 4.5 percent was, reportedly, not accepted.
The focus of the next two weeks to achieve the 4 percent fiscal deficit was more an exercise in juggling figures rather than an attempt to realistically revisit the revenue and expenditure targets. External resources were overstated in 2010-11 with only 2898 billion rupees received out of 3387 billion rupees budgetary target. In FY12 the government anticipates 414 billion rupees from external resources. This figure is unrealistic on two counts.
First, the Stand-By Arrangement (SBA) of the IMF, stalled since May 2010, that was expected to net the country 3.2 billion rupees in budgetary support, accounts for the discrepancy between 2010-11 budgetary expectations and actual disbursements. The likelihood of the government successfully persuading the IMF to reactivate the SBA remains slim given that some of the Fund's key conditions, including the reformed general sales tax, have not been met in the budget.
It is relevant to note that measures taken by the government on March 15 in an effort to satisfy IMF conditions and thereby reactivate the SBA included withdrawal of sales tax exemptions and zero rating facility on domestic supplies of five zero rated sectors (textiles, leather, surgical goods, carpets and sports).
However, these measures failed to satisfy the Fund and its May 17 statement notes that "Reducing the budget deficit will require higher revenue through tax reform to broaden the tax base, including steps to implement reforms in the general sales tax." Thus the SBA, without doubt, is unlikely to be reactivated anytime soon and the government acknowledges this in the budget documents. However, the government expects programme loans (budgetary support) of 118 billion rupees (a jump from the revised estimates of 2010-11 of 39 billion rupees); this is unlikely without the IMF Letter of Comfort.
Second, Pakistan's other donors have also not released pledged assistance and with US law markers clamouring for a revisit to the Kerry-Lugar bill post Osama bin Laden killing, optimistic expectations on the external resources front are unlikely to be realised.
Domestic tax revenue is expected to rise from 1679 billion rupees in 2010-11 (revised downward three times from the budget total of 1779 billion rupees) to 2074 billion rupees. Sales tax revenue is targeted to rise - from the revised target of 655 billion rupees in 2010-11 to 836 billion rupees; customs is targeted to generate 206 billion rupees in contrast to this year's revised target of 173 billion rupees. Interestingly, no single source of indirect tax actually achieved the target in 2010-11. And this is in spite of the March 15 additional measures that were taken in an effort to convince the Fund that the government remained committed to the SBA.
With respect to direct tax collections 30.5 billion rupees of income tax envisaged in the budget 2010-11 could not be realized. However, ever optimistic in terms of revenue collections, the budget 2011-12 envisages additional revenue of 116 billion rupees under direct tax collections - from revised collections of 602,500 million rupees to 718,600 million rupees.
Failure to meet the budgetary tax revenue targets as well as from external sources compelled the government to increase reliance on domestic borrowing resulting in the rise in servicing of domestic debt from the 2010-11 budgetary allocation of 622 billion rupees to 653 billion rupees in the revised estimates. The budget 2011-12 envisages a further rise in domestic debt servicing payments to 715 billion rupees - a whopping 62 billion rupees from this year's revised estimates. This is a highly inflationary policy and is likely to compel the State Bank to keep interest rates high with its associated negative impact on private investment.
Total interest payments for both domestic and foreign debt rose from the 2010-11 budgetary estimates of 699 billion rupees to the revised estimates of 728 billion rupees, and are expected to rise to 791 billion rupees in 2011-12. It is indeed unfortunate that the country's economic managers have rendered even this item that can be accurately determined at the start of a fiscal year, if the budget document is strictly adhered to, subject to understatement. And the obvious question is if the government would be able to keep within this target next year. Past precedence clearly shows that it will not succeed.
Defence, the second largest recipient of current expenditure is to receive 495 billion rupees this year and it is not clear as to how much defence would receive under the Coalition Support Fund. Defence allocations have increased by 50 billion rupees - from revised estimates of 447 billion rupees to 495 billion rupees incorporating a rise of around 12 percent however with the rate of inflation at 14 percent according to the Economic Survey defence allocation would decline in real terms.
Salaries and allowances would rise from the budgetary estimates of 2010-11 of 88.6 billion rupees (including the envisaged 50 percent pay rise) to the revised estimates of 92.5 billion rupees to the 2011-12 budgetary target of 103 billion rupees. The Finance Minister announced a further rise of 15 percent in salaries. This would raise the spectre of wage push inflation.
Pubic Sector Development Programme would receive 730 billion rupees in 2011-12 - 67 billion rupees more than the budgetary estimates of 2010-11 (663 billion rupees) and 262 billion rupees more than the revised estimates of the current fiscal year (462 billion rupees). There will be few takers with respect to the government's ability or indeed intent to meet this target.
Subsidies would be reduced to 166 billion rupees - a reduction of 229 billion rupees from the revised figure of 396 billion rupees and a rise of 40 billion rupees from the budgetary figure of 2010-11 raising doubts about the government's intent to meet this target. Reduction in subsidies is a key IMF condition. The government has taken some economically challenging decisions with respect to subsidies for next year - decisions that it had also taken in 2010-11 and failed to implement, thereby raising doubts for next year. These include: (i) subsidy to Wapda in last year's budget was earmarked at 84 billion rupees and actual subsidy in the revised budget estimates was 296 billion rupees; it is unclear whether the envisaged subsidy for 2011-12 of 123 billion rupees would suffer the same fate, (ii) subsidy to KESC in last year's budget was envisaged at 3.3 billion rupees and the government violated this commitment by extending a subsidy of 47 billion rupees. This year's total for KESC is 25 billion rupees, (iii) excepting sugar the TCP subsidy would remain zero and the Ramadan package would receive 2 billion rupees. To conclude, the major macroeconomic targets set by the government as components of the medium term budgetary statement have not been met: the GDP growth was forecast at 4.5 percent and actual growth has been at 2.4 percent, inflation was targeted at 9.5 percent and is at present 15.5 percent (though the Economic Survey estimates inflation at 14.1 percent). Next year's growth is forecast at 4.2 percent and inflation at 12 percent. Are there any takers for this except Dr Sheikh!