Pakistan needs to reprioritise its fiscal front: ADB study

Pakistan needs to reprioritise its fiscal front after recent floods in order to expand its fiscal space for reconstruction, a recent study of the Asian Development Bank (ADB) states. According to the study, 'Asian Development Outlook 2010 Update: the Future of Growth in Asia', the government of Pakistan in the budget for FY2011 has already emphasised its commitment to fiscal consolidation and policies needed to support a robust expansion of the economy.
The study says that the expectations regarding pledges made by the Friends of Democratic Pakistan in Tokyo in April 2009, have been revised downward in the face of the slower than expected pace of disbursements in FY2010. External support in response to flood-related damage will contribute to higher increases in development spending with the magnitude of the increase for FY2011, among other factors, to be determined also by the absorptive capacity of the economy.
Total outstanding guarantees for State-owned Enterprises (SOEs) at end-April 2010 amounted to 4.2 percent of GDP, underscoring the budget's vulnerability to SOEs, both in terms of their performance and their contingent liabilities. Privatisation of some large SOEs is on hold for the moment, but measures to improve management and reduce their increasingly burdensome losses are urgently needed, the report adds.
Both the magnitude and the composition of federal spending in recent years, have undermined macroeconomic stability and sustainability, and these trends must change. The compression of development spending to accommodate runaway recurrent costs is neither consistent with fiscal sustainability nor is an improvement in the external account, built on restrained imports needed for investment and capital development.
Alignment between expenditure and the policy priorities that provide fiscal space to support critical investments in infrastructure is needed both to broaden the economic base and to achieve sustainable improvements to the current account, the report suggests. Lower imports, lower development spending, and an explosion of unproductive recurrent spending for subsidies simply increase the apparent risk to investment, reducing the inflows needed to put the economy on a sustainable path, it said.
According to the study, the economy of Pakistan has achieved a modest recovery during the FY2010, as foreign reserves have strengthened and the inflation has been moderate while the continued pressure from the subsidies as well as weak tax receipts overwhelmed the targeted budget deficit. The study indicates that the continued power shortages and security conditions have held growth to a modest 4.1 percent in FY2010 up from 1.2 percent in FY2009.
The study reveals that investment in Pakistan remained weak in the context of subdued economic recovery and continued energy shortages. Total fixed capital formation contracted by 2.0 percent for the year: private investment dropped by 5.1 percent, more than offsetting a 6.5 percent increase on the public side. The decline in large-scale investment in manufacturing (15.4 percent) is a worrisome sign for the urgently needed strengthening and modernisation of the structure of production, as are the very large contractions in investment for electricity and gas (11.0 percent) and transport and communications (14.1 percent), where additional capacities are needed to support sustainable growth.
The study highlights that the fiscal performance fell short of FY2010 budget targets. Planned policy reforms lost momentum, as pressures on foreign reserves eased and calls for higher spending increased. The fiscal deficit at 6.3 percent of GDP was substantially higher than the 5.3 percent of GDP outcome in FY2009. Even though the Public Sector Development Programme was slashed by a fifth to 3.5 percent of GDP, this cut was insufficient to offset increased outlays for security, subsidies, and transfers to provincial governments.