The State Bank of Pakistan on Tuesday indicated that revised fiscal deficit target of 4.7 percent of GDP seems to be challenging. According to SBP's second quarterly report developments during H1FY12 indicate that risks to macroeconomic stability are stemming from the external sector and the continued weaknesses on the fiscal side.
It added that in terms of the real sector, there has been some improvement since the publication of SBP's Annual Report in December 2011. "The economy is still expected to grow in the range of 3 to 4 percent and inflationary outlook has improved slightly on account of supply side factors (food). It is expected that FY12 inflation will fall within the range of 11.0 to 12.0 percent, with a bias towards the lower boundary," the report said.
It said that in spite of the lower fiscal deficit during H1FY12, containing the overall fiscal deficit to its revised target of 4.7 percent of GDP seems to be challenging. Quarterly data for previous years has shown that the deficit remains relatively higher in the second half of the year, it said, adding that the achievement of the revised fiscal deficit is dependent on the realisation of: (1) the envisaged surpluses from provincial governments, which are likely to be lower than expected; (2) the non-tax revenues, which depend on inflows into the Coalition Support Fund, and the auction of 3G licenses; and (3) strict control over expenditures.
According to the Report, the burden of financing this deficit will fall on the banking system, specifically on commercial banks. Other than growing concerns about the supply of loan-able funds for the private sector, renewed government borrowing from SBP entails rising inflationary expectations in the economy, it said.
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