Lengthening shadows on the fiscal front

The forecast of high fiscal deficit during the current year is almost certain to materialise because it is not guesswork any more but coming straight from the horse’s mouth. Briefing the Senate Standing Committee on Finance on 4th January, 2011, The finance secretary, Waqar Masood, has stated that the fiscal deficit during July-December, 2010 was expected to remain in the range of 2.8-2.9 percent and efforts were under way to contain the fiscal deficit at below 6.0 percent of the GDP as against 4.7 percent agreed with the IMF for the current fiscal year.The government, on its part, was contemplating serious measures to bring the fiscal deficit on track, but subsidies and security-related expenditures were the stumbling blocks. Rs 301 billion were injected into power companies to clear the arrears on account of the circular debt, but despite that, an amount of Rs 145 billion was yet to be paid. In addition, a significant amount was also stuck on account of the commodity circular debt because wheat was procured by the government more than the requirements of the country. The government was trying to minimise its borrowings from the State Bank to control inflation and these were reduced substantially after the inflows of Rs 60 billion on account of the Coalition Support Fund (CSF).

The Governor, SBP, Shahid Kardar, was also very concerned in the same forum about the excessive fiscal gap but his approach to the problem and degree of emphasis on various aspects was somewhat different. At the current rate, “the fiscal deficit could reach 6 percent of GDP” and this would mean government borrowings of Rs 1 trillion from the banking sector, which would hurt the private sector and increase the cost of credit. The financing of the fiscal deficit, through the SBP, would also push up inflation.The government’s direct borrowings for the budget may touch Rs 1.2 trillion, which could increase to Rs 2 trillion if subsidies like that on urea import and for the power sector and commodity operations were also added. Kardar pointed out that the fiscal sector continued to overshadow the money sector and continued deficit financing made interest rate increases unavoidable. Broadening of the tax base, therefore, was imperative in the current economic scenario. He also revealed that during a recent meeting with the Prime Minister, it was decided to reduce government dependence on borrowings from the SBP. According to the new plan, the government would borrow from the Islamic banking system and treasury bills would also be sold to the common man.

The confirmation by the two top functionaries of the government that the picture of the public finances of the country is really bleak is alarming, to say the least. A budget deficit of 6 percent of GDP (or about 7.5 percent, as estimated by certain other experts) together with the bulging circular debt and increasing credit requirements for commodity operations and PSEs would be highly damaging for the economy in terms of price stability, exchange rate, availability of credit to the private sector, indebtedness of the country, the growth rate, the level of employment etc and there is absolutely no doubt that such a trend has to be reversed at the earliest to restore macroeconomic stability and enhance the welfare prospects of the ordinary people. Unfortunately, however, there does not appear to be any concrete plan at the moment to reduce the budget deficit to manageable levels. In fact, political expediency has lately so much dominated the debate that any talk of raising more revenues and reducing expenditures is immediately obfuscated by non-economic considerations and vested groups. For instance, the issue of the RGST has been publicised in such a negative way that its imposition, even in a mild form, does not seem to be possible any more. Similar is the case with the removal of subsidies or levy of taxes on exempted sectors like agriculture.

In a charged political atmosphere, the government may have to reverse the recent hike in domestic oil prices. Reducing current expenditures is not even a remote possibility when defence expenditures have to be increased continuously to fight increasing militancy and debt servicing is mounting due to the escalating stock of debt and higher interest rates. Ordinary people are so outraged about the fiscal anomalies and its inequity that they find it abominable to finance the perks and privileges of an army of ministers at the central and provincial levels. The CSF which the Secretary of Finance has referred to as a financing item is not only unsustainable, but would appear to be disdainful to a large number of people.Some of the fiscal problems of the country could have been properly tackled if the government was strong enough to carry the day and convince the opposition parties and the ordinary people about the desirability of improving the fiscal position of the country by undertaking harsh measures. Contrary to such a position, the government is so weak at the moment that any talk on the subject by its economic managers seems to fall on deaf ears and is largely ridiculed by all and sundry.Against this background, we feel that both, the Secretary Finance and Governor SBP, have done a good job in presenting the case for fiscal improvement properly but the poor effect of such a worthy effort is not hard to visualise. Also, contrary to the suggestion of the State Bank Governor, the overall impact of involving Islamic banks in the borrowings to the government sector or the sale of treasury bills to the non-banking sector, on the rate of inflation and health of the economy would, in our view, be only negligible. The country needs to confront the problem of fiscal mismanagement squarely, rather than trying to delay the inevitable by resorting to half-baked measures – Brecorder