WEDNESDAY APRIL 11: Budget fiscal year 2013: risks kept in mind

ISLAMABAD: The federal finance ministry has prepared Federal Budget 2012-13 accepting "risks to the budget" as well as "possible fiscal risks," according to budget documents. The budget for the next fiscal year projects a growth in Gross Domestic Product (GDP) at 4.5 percent, inflation at 9.5 percent and fiscal deficit at 4.2 percent.
The Budget, as indicated by some top executives including the Prime Minister, will be unveiled in the last week of May 2012 but some analysts were of the view that the Budget could be presented much earlier. According to official documents, the consolidated tax ratio is likely to be raised from 10.4 per cent in the current year to 12 percent in the next three years. The tax-to-GDP ratio, estimated at 9.3 percent for the current year, is likely to be increased to 10.3 percent over the next three years.
Provincial tax effort is proposed to increase from 0.4 per cent of GDP to 1.2 per cent over the medium term. Remittances are estimated at $13.1 billion in 2012-13. According to the documents, revenue target is projected at Rs 2.338 trillion (9.7 per cent of GDP) in 2012-13 against the current year's original and revised estimates of Rs 1.952 trillion (9.3 per cent of GDP).
The budget target for levies and surcharges has been estimated at Rs 143 billion in 2012-13 (against Rs 117 billion in 2011-12 revised estimates) and non-tax revenue at Rs 552 billion (against Rs 561 billion in the current year). In this way, the total revenue collection has been estimated at Rs 3.033 trillion, which is 12.6 per cent of GDP by comparison with the current year's revised estimates of Rs 2.6 trillion. After the transfer of Rs 1.421 trillion to provinces in accordance with the NFC Award, net revenue available to federal government is estimated to be Rs 1.612 trillion in 2012-13.
Documents also showed that expenditure during 2012-13 has been estimated at Rs 2.739 trillion. Defence budget is estimated at Rs 545 billion (Rs 50 billion more than the current year), pensions at Rs 147 billion (Rs 27 billion more), federal government service delivery Rs 240 billion (Rs 22 billion less than the current year), subsidies at Rs 120 billion (Rs 70 billion less), grant to provinces at Rs 57 billion (Rs 2 billion more), grants other than to provinces Rs 316 billion (Rs 42 billion less), Public Sector Development Programme (PSDP) Rs 350 billion (151 billion more) and net lending at Rs 31 billion (6 billion rupees less than in 2011-12).
Allocation for payment of interest will be Rs 933 billion compared to Rs 795 billion in the revised estimates for the current year. Federal fiscal deficit has been estimated at Rs 1.125 trillion and provincial deficit/surplus at Rs 110 billion, indicating consolidated fiscal deficit at Rs 1.015 trillion which is -4.2 as percentage of GDP, provincial surplus/deficit will be 0.5 per cent and public debt will be 56 per cent of GDP.
Current account deficit has been estimated at $4.1 billion, exports at $26.7 billion and import $42 billion during 2012-13. Federal government's grants during 2012-13 have been projected at Rs 50 billion, domestic loans (net) at Rs 874 billion and external loans (net) at Rs 91 billion. No projection has been made from privatisation proceeds during 2012-13.
Finance Ministry expects that real GDP growth will be 4 per cent in 2011-12. The projections for headline inflation (y-o-y) for end June 2012 is 11.5 per cent. Large-Scale Manufacturing (LSM) is showing a sign of recovery as July-January growth is 1.3 per cent against negative 0.3 per cent during the corresponding period last year. Agriculture sector is likely to grow by 3.8 per cent. In 2011-12, exports demonstrated 5.5 per cent growth during the first eight months of the financial year over a huge base of $25 billion last year and despite falling cotton prices, energy shortages and recessionary trends in Europe and the US.
Imports grew by 17.4 per cent. The external account deficit widened to $2.9 billion primarily because of high-value of oil imports. Current transfers continued to be the only source of comfort for the external sector. Workers' remittances recorded a healthy growth of 23.4 per cent and achieved $8.6 billion level. Liquid foreign exchange reserves are $16.4 billion by end March 2012, compared with $18.3 billion as of end June 2011. FBR collection continued to show vibrancy, exhibiting a growth of 25 per cent over the first nine months of last year at Rs 1.27 trillion.
The government continued to demonstrate fiscal prudence and discipline. The actual expenditure by end February was 62 per cent of the budget as compared to 67 per cent on pro-rata basis showing a saving of 5 per cent. Fiscal deficit was 3.8 per cent of GDP as compared to 4.3 per cent of GDP last year.
The documents highlight an entire range of risks to the budget including:(i) rising oil prices that have increased to $120 per barrel in March 2012, raising import bill by more than $2 billion so far;(ii) slow down of external inflows; monthly project assistance;(iii) hold up of Coalition Support Fund (CSF);(iv) delay in transfer of Etislat balance;(v) delay in auction of 3G licences; (vi) power sector and food related subsidies;(vii) increase in grants to Public Sector Enterprises (PSEs). Euro Zone crisis is likely to impact Pakistan's exports further. Less than anticipated provincial surplus is also a cause of concern in view of huge transfers to the provinces. These factors are likely to have serious implications both for the fiscal deficit and current account balance.
The finance ministry maintains that significant challenges to macroeconomic stability continue to be containing the fiscal deficit and current account deficit. Other challenges include: (i) tax policy and tax administration reform to mobilise domestic resources taking tax-to-GDP ratio to at least 15 per cent;(ii) power sector and PSEs currently costing 2 per cent in growth and around 2 per cent in fiscal deficit; (iii) security situation; (iv) food subsidies; and (v) provincial revenue mobilisation and management.
The proposed measures to be taken during 2012-13 are as follows: (i) fiscal austerity; (ii) consolidate special programs for balancing regional development; (iii) strengthen targeted social protection; (iv) continue mobilising domestic resources through tax policy and administration reform by broadening the tax base, simplification of tax rules and transparent taxes, elimination of discriminatory tax exemptions; (iii) accelerating restructuring process of PSEs; (iv) tariff rationalisation; ( v) working with provinces for better financial discipline;(vii) Energy sector and infrastructure development remain the focus; (viii) focus on completion of projects; (ix) result-based management and selecting three pilot ministries including FBR and power sector; (x) expenditure review and rationalisation of each Ministry;(xi) review of pay structures for removing distortions; (xii) magnetising non-wage allowances further;(xiii) rationalising commodity operations; (xiv) making pension fund for the benefit of new employees; (xv) offering shares of profitable PSEs to benefit general public through stock market and (xvi) Public Private Partnerships for improving PSEs performance.