TUESDAY DECEMBER 20: Get your fiscal house in order, SBP tells government

KARACHI: The State Bank of Pakistan has called upon the political leadership to put country's fiscal house in order. The central bank fears that in the absence of broad-based fiscal reforms growth this year will be in the range of 3 to 4 percent, fiscal deficit will be above 6.5 percent due to higher level of expenditure (with general election on the horizon) and non-tax revenue would also be lower than envisaged in the budget; as:
(a) uncertainty in receipt of Coalition Support Fund amounting to $1250 million due to a serious deterioration in relations with US; (b) lower receipts of SBP profit than budgeted amount of Rs 200 million due to 150 basis point cut in discount rates; and (c) little progress on the auction of 3-G telecom licences envisaged at Rs 75 billion in the budget.
SBP's report gives a clarion call to formulate a comprehensive medium-term fiscal reform plan, which is staggered and sequenced on the basis of hard lessons of the recent past, with co-ordinated documentation and transparent collection oversight. It should be an equitable plan to capture all commercial businesses and institutions into the tax net; and needs to incorporate a restructuring agenda for loss-making PSEs having a credible enforcement mechanism to anchor this master plan.
SBP warned that "there is no wiggle room left in the current state of affairs." Governmental policy needs to overcome vocal (and latent) resistance. The main ingredients to achieve all this remains the same, as enunciated earlier, emphasises SBP. That is: "(a) political will to widen the tax base to include untaxed and under-taxed segments (agriculture and services); (b) plugging the leakages in the collection machinery; (c) removing subsidies; and (d) restructuring public sector enterprises with a specific focus to reduce the monthly haemorrhaging that is adding to the fiscal burden."
SBP feels that the market is over-reacting to Pakistan forex debt repayments in the current fiscal year. Repayments to IMF's $8.9 billion SBA will start this fiscal year. However, outflows are only $1.4 billion and are scheduled for latter part of the year. Going forward, in the year, SBP expects the current account deficit to be 1.5 to 2.5 percent of GDP, which is relatively small given Pakistan's past performance. However, financing of this current account deficit could be challenging, warns the report. SBP remains hopeful on account of strong remittances from overseas workers and with expanding global recession Pakistani textile exports in the lower segment of the chain not being affected much.
SBP on the other hand is less comfortable with governmental efforts to resolve the circular debt problem. The economic costs of energy shortage are understated, says the SBP report. SMEs and service sector not shown in GDP numbers and both sectors are the primary sufferers. Furthermore, the loss of employment is more severe, as these units are labour-intensive. SBP report called for the immediate launch of large scale projects that focus on alternative energy sources such as hydel and coal.
SBP points out that 2010 floods cannot mask the structural deficiencies in the economy leading to current stagflation. Fiscal problem emanates from lack of tax revenues; fiscal slippages spillover is causing rise of domestic debt as well as the crowding out of private sector, already suffering from acute shortage of power. SBP warns that lower external inflows will further accentuate the crisis this year.
SBP also said that last year's realised tax revenue of Rs 1.07 trillion fell short by Rs 160 billion with year-on-year taxes not keeping pace with nominal GDP. This means tax revenues actually fell in real terms, says the report. As a result there was an increase of stock of debt and liabilities. They went up by Rs 1.763 trillion last year to Rs 11 trillion (60.9 percent of GDP); with interest payments alone accounting for 32.8 percent of governmental revenues. This further squeezed fiscal policies ability to spur growth, according to the report.
Funding from external sources, last year, was primarily utilised for servicing of external debt. A decline in external aid and loans forced the government to domestically borrow Rs 1.1 trillion, which accounts for 91 percent of fiscal deficit, thereby crowding out the private sector credit from commercial banks. And, forcing SBP to pump in surplus liquidity which kept the inflationary pressures to persist throughout the year, the report concluded.