The government is facing increasing pressure on fiscal deficit with consensus in the Ministry of Finance that projected 4 percent of the GDP forecast in budget 2011-12 documents is simply unachievable.
Last year, too, the government had forecast 4 percent of GDP fiscal deficit, which it revised upward to 5.7 percent on June 5, when the budget for 2011-12 was announced on the floor of the House. However, the State Bank's 2010-11 report sowed 6.6 percent fiscal deficit for last year, and has now projected a fiscal deficit of 5.5 percent to 6.5 percent of GDP for the current fiscal year.
The main contributors to the rise in deficit, according to background discussions with Ministry of Finance officials, are: (i) over-stating tax collections. Last year, actual government tax collections were Rs 52 billion less than budgetary estimates; (ii) external resources were also over-stated in last year's budget by almost 97 billion rupees. Sources maintain that this year the figure might be even lower, with no program lending expected subsequent to the cessation of the IMF program; (iii) current expenditure is higher than budgeted. Last year, the budgetary allocation was 1997 billion rupees, while revised estimates placed actual allocation at 2559 billion rupees. Incidentally, the bulk of additional allocation on current expenditure last year was not on Defence, but on subsidies.
Officials in Finance Ministry blame lack of political will for the country's existing economic woes. They further point to the continued failure of the government to usher an era of austerity, as required, or indeed to desist from relying on external resources in the budget. Multilaterals and bilaterals are unwilling to disburse pledged assistance to Pakistan not only because they are grappling with global recession that requires large bailout packages for their own economies but also because they are not supportive of obvious lack of implementation of reforms and profligacy in Pakistan.
Sources said that a minimum shortfall of Rs 60 billion is expected in projected revenue collection by the Federal Board of Revenue (FBR) in 2011-12, along with uncertainty about materialisation of nontax revenue of $850 million estimated against 3-G licences and CSF disbursement. The revenue shortfall would be more pronounced in the second half of the ongoing fiscal year as revenue collection target was set relatively lower and, therefore, achievable for the first six months to ensure that FBR Chairman Salman Siddique, scheduled to retire in January 2012, would not face criticism. Skeptics add that the achievement of the revenue target during July-December 2011 may be considered a key benchmark for possible extension in Siddique's service.
Sources project fiscal deficit closer to 7 percent of the GDP in 2011-12, and hinted at continued massive borrowing from commercial banks and State Bank of Pakistan for magnetisation of fiscal deficit, which would be even more disastrous for both the economy and the common man as it would trigger inflation.
The increase in trade deficit is also a matter of grave concern for the economic managers as it would adversely affect the current account deficit and, consequently, lead to a balance of payments crisis in the country. The global economic recession has also cast serious doubts about the continuation of the remittances blessings.
An official said that pressure is being felt on the current account deficit and the non-materialisation of estimated $1 billion on account of Coalition Support Fund (CSF), $400 million Kerry Lugar Bill (KLB), $850 million privatisation proceeds on account of PTCL Privatisation and 3-G licences could collectively generate enormous pressure on foreign exchange reserves. The government borrowing from domestic resources would cross Rs 1300 billion in the current fiscal year if the $4.7 billion or Rs 413 billion estimated external resources fail to materialise.
Sources said that the economic team fully realises that approaching the International Monetary Fund (IMF) would not be easy this time around, and the country would have to fulfil some tough pre-loan conditions if it is to succeed in procuring another loan.