State Bank of Pakistan wants quick steps to contain fiscal deficit

KARACHI: SBP on Monday asked the government to move quickly to broaden its tax base and restructure loss-making public entities to control its widening fiscal deficit, which is already set to overshoot targets.

Analysts say the widening deficit could threaten Pakistan's economic stability and hit its sovereign credit ratings. The IMF has also pushed Pakistan to narrow the gap by eliminating subsidies and increasing its tax-to-GDP ratio, one of the lowest in the world.

The State Bank of Pakistan said that the fiscal deficit for fiscal 2011/12 ending June 30 is likely to range between 5.5 and 6.5 percent of gross domestic product (GDP), "with a bias on the upside", against a government target of 4 percent.

"In our view, policymakers may consider formulating a comprehensive medium-term fiscal reform masterplan, which is staggered and sequenced on the basis of the hard lessons of the recent past," SBP said.

"Coordinated documentation; transparent collection with oversight; an equitable plan to capture all commercial businesses and institutions into the tax net; a restructuring agenda for loss-making PSEs; and a credible enforcement mechanism, must anchor this masterplan," it said.

The International Monetary Fund (IMF) said in October that Pakistan's 2011/12 fiscal deficit is expected to widen to 5.3 percent.

SBP also said in its annual report that the economy is likely to grow by 3-4 percent during the year, broadly in line with the 3.8 percent forecast by the IMF, but lower than the government's target of 4.2 percent.

In 2010/11, the fiscal deficit came to 6.6 percent of GDP, overshooting the government's target of 4.0 percent, which the SBP said was due to the failure of the government to broaden its tax base, phase out subsidies in a timely way and restructure loss-making public sector enterprises (PSEs).

In 2008, Pakistan and IMF agreed on a 3-year loan package worth $11 billion, but the programme was halted in 2010 because of slow implementation of fiscal reforms, and only $8 billion has so far been disbursed.

The programme ended on Sept. 30 and Pakistan opted not to seek a new loan or an extension.

The SBP also forecast inflation averaging 11.5 percent to 12.5 percent in 2011/12, broadly in line with the government target of 12 percent, but lower than the IMF's forecast of 14 percent.

Copyright Reuters, 2011