Fiscal deficit below seven percent a tall order

The country''s economic managers are facing a serious challenge to keep the fiscal deficit below 7 percent and maintain foreign exchange reserves with State Bank of Pakistan at the current level of $13 billion due to non-materialisation of estimated external inflow for the current fiscal year as well as other domestic factors. The budget for fiscal year 2011-12 envisages external inflows of 287.2 billion rupees, out of which 117.8 billion rupees was envisaged as programme loans.
However, multilateral donors confirmed to Business Recorder that they are not likely to extend any programme lending until the government gets a letter of comfort from the International Monetary Fund or undertakes critical though politically challenging macroeconomic reforms. Neither of these conditions has so far been met to the satisfaction of the multilaterals as well as bilaterals, and it is unlikely that this amount would materialise.
Sources said that the fiscal deficit may well cross 7 percent in the current fiscal year as materialisation of $850 million on account of 3-G licenses is unlikely. Additionally, the government is also unlikely to achieve 1952 billion rupees revenue collection target in the current fiscal year, or contain the subsidies for the power sector.
In the wake of the floods and dengue this year the provinces are also not likely to attain the federal budgetary estimated target of 0.6 percent provincial budget surplus. A top official of the State Bank of Pakistan told the media that foreign exchange reserves of the government with the State Bank of Pakistan (SBP) may well decline to below $10 billion in the current fiscal year, if estimated $4 billion foreign inflows do not materialise.
He said that current account deficit for the current fiscal year was estimated on the assumption that $1 billion Coalition Support Fund (CSF), $850 million 3-G license as well as $3.9 billion International Monetary Fund (IMF) would materialise in the ongoing fiscal year. With the suspension of the IMF program, the government is banking on $1 billion each from the Asian Development Bank (ADB) and World Bank (WB) and materialisation of $800 million from privatisation proceeds of Pakistan Telecommunication Company (PTCL) from Etisalat to support the foreign exchange reserves.
Non-materialisation of any of these sources of funds would be a major blow for the economic team and the country would be in a 2008 like balance of payments crisis that forced it to take bailout package from the IMF to avert the crisis.
Sources said that the situation on trade account was also very gloomy after decline in cotton prices in the international market. That is expected to negatively impact the exports by $2 billion. On the other hand, he said, the rising price of oil in the international market would balloon the import bill and, consequently, the current account deficit. All these unfolding factors, he said, would bring the exchange rate under further pressure.
He said that the government would resort to borrowing from local banks if programme lending for budgetary support did not materialise and consequently credit to the private sector would be crowded out and have a negative impact on the GDP growth.