Efforts by the new government to help the poor in its first budget to be announced this week are being constrained by the need to tackle yawning deficits and slash subsidies, analysts said on Monday. "Since this is a political government, the focus will be on providing relief to the poor," said Asif Qureshi, head of research at Invisor Securities Ltd.
"(But) these are difficult times for budget-making, considering the trend in global commodity prices...It will be quite challenging to reduce the fiscal deficit, and on the revenue side, the government will have to be more aggressive." Analysts say Pakistan suffered from a paralysis in decision-making during the last months of the previous government, and during a caretaker administration that ruled until the new government was formed.
The failure to trim food and fuel subsidies exacerbated spending overshoots, while revenue collection has lagged and after averaging 3.7 percent of GDP for the past five years, the fiscal deficit ran out of control in 2007/08. The fiscal deficit is on course to be about 9 to 9.5 percent of GDP in 2007/08, but the government is hoping foreign loans will drag it down to 6.5 percent, still well above a target of 4 percent.
The current account deficit is expected to be between 7.3 and 7.8 percent of GDP for the year, against a target of 4.8 percent. Annual inflation was 17.2 percent in April while stocks have lost 8.3 percent since January and the rupee is down 9.8 percent. The government said it inherited an economic mess but critics say its attention has been consumed by wrangling over the fate of the unpopular President Pervez Musharraf.
CUTTING SUBSIDIES: The government is aiming for 5.5 percent growth in 2008/09, after it slipped this year below 6 percent. The government has said it will boost development spending by 4 percent to 541 billion rupees ($8 billion) with "a comprehensive safety net" for the poor. But analysts said the government had very limited space for fiscal manoeuvring. "Given high economic and political pressures, a popular budget is the need of the hour," Muzzamil Aslam, an economist at Merrill Lynch, said in a note. "Fiscal constraints could however limit the complete transaction of intent into action."
The most pressing requirements, because of high global commodity prices, is to reduce domestic demand for oil so as to bring down the twin deficit, analysts said. The International Monetary Fund says Pakistan needs to focus on cutting oil subsidies, which analysts estimate cost the government up to 50 billion rupees a month, to cut the deficits.
Cutting subsidies will fuel inflation but, in the long term, inflation should ease as government borrowing falls, while more money would be available for social outlays. The Social Policy and Development Centre think tank said this month there was room to cut the defence budget, which was 275 billion rupees, or 14.7 percent of the budget last year, after peace talks with militants. Analysts said they expected new taxes and increases in existing taxes on luxury items to boost revenue.
The Karachi Stock Exchange battered by political and economic uncertainty in recent weeks, has already welcomed a two-year extension of an exemption on capital gains tax. Analysts said the fertiliser sector was likely to benefit as the budget should give priority to the agricultural sector, while the financial industry could come under pressure if banks' corporate tax rate was raised.
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