SBP estimates FY11 fiscal deficit close to Rs 1.127 trillion

Fiscal deficit in FY11 may have reached close to Rs1.127 trillion, or 6.2 percent of GDP, according to the State Bank of Pakistan''s monetary policy statement. The State Bank of Pakistan on Saturday pointed out that exemptions and ineffective taxation of income generating sectors of the economy are limiting the revenue generation capacity.
The State Bank in its MPS said that the main structural weaknesses causing this high level of fiscal deficit and a rise in total debt are low tax-to-GDP ratio and rigid current expenditures.
While exemptions and ineffective taxation of major parts of income generating sectors of the economy are limiting the revenue generation capacity, continued provision of financial support to the loss making public sector enterprises (PSEs) and untargeted subsidies are keeping the current expenditures under pressure.
Consequently, the tax-to-GDP ratio remained low at 8.6 percent in FY11, and fiscal adjustment inevitably resulted in cuts in the development expenditures, which is not desirable, given the infrastructure needs of the economy.
According to MPS, the reasons for growing government borrowings were structural and not specific to FY11, though it must be acknowledged that FY11 was a difficult year, given floods and other pressing spending needs.
The consolidated fiscal data has not been released. However, provisional estimates from the financing side indicated that the fiscal deficit in FY11 must have reached close to Rs 1127 billion, or 6.2 percent of GDP. Excluding the one-off payment of Rs120 billion to partially settle the circular debt in the energy sector, the fiscal deficit in FY11 comes down to 5.6 percent of GDP, the State Bank said.
The government borrowing from scheduled banks, however, increased substantially. It grew by 74.5 percent in FY11 and contributed 65 percent to the 15.9 percent growth in broad money (M2). The growth in private sector credit, on the other hand, was only 4 percent with negligible demand for fixed investment.
These monetary trends show that the decline in aggregate demand was less than desirable, and expansion in productive capacity of the economy remained weak. Both these factors would help understand the persistence of inflation.
The falling productivity, due to severe energy shortages and deteriorating law and order conditions together with unanticipated and sporadic adjustments in the administered prices, also added inertia to inflation.