The World Bank in a report titled Pakistan Economic Update 2011 carried on its website maintained that "satisfactory expenditure containment and revenue collection from recent measures for fiscal consolidation, and a solid Finance Bill 2011 could pave the way for resumption of Stand-By Arrangement (SBA) or opening talks for a new IMF programme in the next fiscal year."
Those who may consider this as an endorsement of the budget for the forthcoming fiscal year, duly approved by the National Assembly on Tuesday, need reminding that this assessment, in all probability, is premised on the discussions that were held between the International Monetary Fund (IMF) and Pakistan's economic team between May 11 and 17 at Dubai.
At that time Pakistan's economic team intimated to some sections of the local media that talks had been successful, and might lead to the release of the second-last tranche of the SBA, which prompted the IMF team to place a statement on its website dated May 17: "The mission welcomed the recent strengthening of the external position and some of the tax measures announced in March, which represent an important milestone.
Discussions centred on measures to reduce the budget deficit in 2011-12 as well as quasi-fiscal operations (for example, the procurement of agricultural commodities) to reduce inflation, assure fiscal sustainability, and protect the external position. Reducing the budget deficit will require higher revenue through tax reform to broaden the tax base, including steps to implement reforms in the general sales tax.
Measures to reduce spending on general subsidies in the energy sector have begun to be implemented. The quality of expenditure could be improved by increasing the share of spending on health, education, and infrastructure. Continued efforts are needed to reduce the budget deficit to take the pressure off monetary policy and create space for more credit to the private sector. In addition, as government debt has increased, debt management needs to be improved.
Moreover, careful monitoring of the financial sector is needed to assure continuing financial stability." The critical question is whether budget 2011-12 meets this comprehensive list of IMF conditions? At first glance the budget does meet most of the conditions stipulated in IMF's May 17 statement. However, there is a general consensus that the budget targets are unrealistic. The government can, of course, claim quite legitimately that it not only is committed to meeting the targets contained in the budget documents but would ensure that they are met.
This claim can be challenged on two counts. First and foremost the 125 billion rupees (1.46 billion dollars) consolidated provincial surplus that the federal budget was relying on has been translated into a 5.58 billion rupee deficit subsequent to the presentation of the provincial budgets in the four provincial assemblies. Hence, all other things remaining the same the deficit would rise by this amount.
And second, the government's contention that this time around, it would be able to meet the revenue targets can be challenged on two counts: (i) donor fatigue with the failure of the economic team to implement taxation (as well as other reforms) that include taxing the elite resulting in lower disbursement of pledged assistance; and (ii) failure to check the inflationary spiral compelled the government to subsidise the energy sector as well as prices of essential food items available with the Utility Stores in excess of the target set in the budget 2010-11 by 269 billion rupees.
With the likelihood of the budget deficit being higher than the 4 percent target next year the government would be politically unable to reduce subsidies by 229 billion rupees in 2011-12 as indicated in the budget. In effect with an estimate increase in subsidies of around 200 billion rupees and a 125 billion rupee reduction in revenue collection around 300 billion rupees would add to the deficit which would, if past precedence is anything to go by, translate into a reduction in the Public Sector Development Programme (PSDP).
However, considering that the federal PSDP in 2011-12 is 300 billion rupees the government's manoeuvrability in terms of relying on slashing PSDP to effectively meet its deficit targets would be compromised. This does not include the government's failure to attain any of the budgetary revenue targets in 2010-11 including tax revenue (direct as well as indirect) and non-tax revenue.
In this context, it is unlikely that the IMF or indeed the World Bank would endorse the budget. Business Recorder, however, would like to remind its readers that the IMF team had indicated during its May meetings with the Pakistan team that reactivation of the SBA would depend on not only the budget itself but also on the implementation of budgetary proposals. That obviously remains to be seen and it is doubtful if the SBA tranche would be released in July when the next IMF/Pakistan talks are scheduled.