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An
analysis of the macro-economy
The government badly needs substantial
fiscal space, and that requires good
governance, transparency, increase in the tax-to-GDP ratio, and a sensible
drive
for privatisation
By
Mehmood-Ul-Hassan Khan
The
macro-economy of Pakistan is not performing well due to many interrelated
reasons. The pace of recovery is fragile and the road towards
macro-economic stability and sustainability seems to be far away to
achieve. Frequent political mockery gives negative signals to local as
well as foreign investors. The ongoing war against terror is one of the
main hurdles in achieving our budgetary targets. Apparently, the country
is under the siege of darkness due to acute energy crisis which has
already lessened our chances to meet our macro-economic targets in the
ongoing fiscal year.
According to the
ministry of finance, the budget deficit of Pakistan surged 42 per cent to
2.7 per cent of GDP between July-December 2009 compared with 1.9 per cent
in the same period of previous year. So, prospects are not so bright even
in the ongoing fiscal year too.
Due to continued poor
performance of many giant public entities like Pakistan Steel Mills,
Pakistan International Airlines (PIA), railways (railways badly needs
Rs.200 billion) and Water and Power Development Authority (WAPDA), the
government is under tremendous financial pressure to rescue them on a
regular basis.
The government is
bearing an additional Rs170 billion in the shape of security expenditure,
Rs85 billion on account of electricity companies, Rs20 billion in
additional support to the textile industry, Rs10 billion for railways and
Rs25 billion for the utility stores corporation. Because of these
unbudgeted expenditures, it seems that the budget deficit may increase to
5.3 per cent of GDP i.e. Rs800 billion instead of the targeted 4.9 per
cent, or Rs722 billion. Huge circular debts of Rs.175 billion is supposed
to be one of the main hurdles in achieving many targets of the
macro-economy. Frequent issuance of the term finance certificates (TFCs)
is not paying its dividends.
Moreover, the fiscal
deficit, inflation, agriculture and in services sector, growth targets may
not be achieved as fiscal deficit is estimated at over 5.2 per cent of the
GDP against the initial budgetary estimate of 4.9 per cent. The declining
tax-to-GDP ratio is a serious issue which has multiplier effects on the
macro-economy. According to the fiscal policy statement (2009-10),
released by the finance ministry, the Federal Board of Revenue (FBR) had
collected Rs1157 billion at the end of 2008-09. The tax-to-GDP ratio ended
at low ebb of 8.8 per cent, down by 1 per cent point as compared to
previous year.
According to the
ministry of water and power, due to complicated hydropower politics in and
around the borders the country is losing more than Rs320 billion per annum
(Rs219 billion in industrial sector, cut in exports of worth Rs75 billion
and loss of 400,000 jobs). But good thing is that cotton output is higher
than expected which may reduce miseries in agricultural productivity and
profitability. According to the ministry of food, a 13 per cent increase
in cotton output till mid-February may compensate to some extent the
likely shortfalls in production of wheat and sugarcane.
Services sector growth,
estimated at 3.9 per cent in the budget 2009, would be around 3 per cent
by the end of the current fiscal year. The ratio of non performing loans (NPLs)
is on the rise and on the other hand the recovery speed is at its lowest
ebbs. Business activity is not gearing up and banks are reluctant for
further lending. Declining ratios of domestic savings and the huge banking
spread played contributory roles in the low growth of services sector in
the country.
In federal budget 2009,
the government expected 5.5 per cent growth in large scale manufacturing (LSM)
against the budgetary target of 1.8 per cent, which would push the GDP
growth to 3.4 per cent from the 3.3 per cent target set in the budget. The
LSM that had contracted 8.2 per cent during the last fiscal year grew at a
modest pace of 1.4 per cent during the first half of the current fiscal
year
The current expenditure
for the ongoing fiscal year has been revised upward by Rs199 billion,
while development spending has been readjusted downward by Rs253 billion
largely owing to non-materialisation of pledges made by friends of
Pakistan (FoP). Most recently the US through USAID provided Pakistan
financial assistance of Rs7.2 billion or $84 million for the Benazir
Income Support Programme (BISP), but the relief may not produce
substantial effects in the overall current expenditure tally. Comparative
study of the different available data showed that current expenditure for
the ongoing fiscal year has been revised upward from Rs2103.8 billion
targeted in the budget to Rs2403 billion. Total revenue also increased
from Rs2155.4 billion to Rs2187 billion, while total expenditure has
increased from Rs2877.4 billion to Rs2913 billion.
From time to time, the
development expenditure has been reduced from Rs763.1 billion to Rs510
billion to maintain the fiscal deficit at a reasonable level. It is
predicted that non-materialisation of the expected $1.2 billion external
inflows in the current fiscal year would put the economic managers of the
country in a difficult situation. Moreover, the government is considering
further slashing the Public Sector Development Programmes ( PSDPs) 2009-10
by 50 per cent.
The Debt Policy
Statement 2009, prepared by the Debt Office of the Ministry of Finance and
submitted to the Parliament, has expressed some serious concerns over the
current debt to GDP ratio of 58.1 per cent. The Fiscal Responsibility and
Debt Limitation Act 2005 sets a limit on the rise of this ratio to a
maximum of 60 per cent. So, it seems that the present government has come
dangerously close to reaching its limit with respect to reliance on debt,
both foreign and domestic. Pakistan’s external liabilities soared to
almost $3 billion during the first quarter of this fiscal year. It is
feared that if the increase in external debt remains consistently
unmatched with GDP growth and foreign exchange earnings, then the country
may once again face debt servicing difficulties. Moreover, according to
the SBP data the country’s domestic debt surged by 11 per cent to
Rs4.292 trillion in seven months from June 2009 to January 2010, as the
government continued to issue bonds and treasury bills to bridge the
fiscal deficit.
Structural issues
(a) Energy crisis (b)
Low tax-to-GDP ratio, lowest in the region (c) Low PSDP allocation (d)
Heavy reliance on external conditional loans (e) High ratios of poverty
(f) Illiteracy (g) Low ratios of investments in social sectors (i) Lack of
innovative inputs.
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COMPARATIVE STUDY
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Indicators
July-Dec FY2010
July-Dec FY2009
CPI inflation
10.3%
24.43%
Rupee parity
Rs84.24
Rs.78.97
Imports
$15.994 billion
$19.117 billion
Exports
$9.791
$9.474 billion
Trade deficit
$6.803 billion $9.643
billion
Current a/c deficit
$1.758 billion $7.846
billion
Worker remittances
$4.53 billion $3.64
billion
Foreign reserves
$15.244 billion
$2.16 billion
LSM
0.66%
-5.57%
Tax revenue
Rs581 billion
Rs553.8
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Source: SBP, FBS
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The above table shows
that the prospects of the macro-economy are not so impressive due to slow
pace of recovery. Paradigm shift is urgently needed to achieve our main
targets of budget 2009. The government badly needs substantial fiscal
space which requires complete good governance, transparency, increase in
tax-to-GDP ratio, and a sensible drive of privatisation which may rescue
us from our socio-economic shortcomings.
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