Govt missed all fiscal targets in 2009-10: SBP

Unaddressed structural weaknesses and key reforms fail to gain traction during outgoing fiscal year, says State Bank.

KARACHI: Fundamental structural weaknesses in the economy remained unaddressed and key reforms failed to gain traction during the outgoing fiscal year, said the State Bank of Pakistan (SBP) in its annual report on the state of the economy for the year 2009-10.

The report released on Monday noted in a tone of regret that “persistent disagreements led to the deferment of a proposed expansion of the tax net through the introduction of a broad-based GST”.

It also noted that the “proposed restructuring of public sector enterprises, to improve efficiency and lower the fiscal burden, did not take place,” and that “there was little or no progress in either resolving the energy sector debt chain or substantially improving electricity supply”.

The central bank described the government’s expenditure as the “principal structural problem” pointing out that, “the fiscal deficit bounced back to 6.3 per cent of GDP in FY10” having climbed 110 basis  points since last year. Echoing the complaint of various private sector enterprises, the central bank said that increasing expenditure of the government “crowded out and otherwise undermined private sector activities”.

The SBP also held fiscal expansion responsible for persistent “double-digit inflation” as well as substantial increases in total public debt and liabilities which jumped “from 68.7 per cent of GDP in FY09 to 69.5 per cent in FY10”.

The central bank termed the initial tax revenue targets for FY10 “optimistic” and said that the eventual Rs77 billion shortfall in total revenues was “not surprising, given the absence of any significant measures to expand the tax base or to exploit the existing tax base effectively”.

Using uncharacteristically strong words, the annual report said “slippage on the expenditure side was more disappointing”. The SBP acknowledged that the government has limited options to cut down spending on “debt servicing, defence, the government salary bill, etc.”, but added that, “there appears little evidence of efforts to contain the growth in even the discretionary components”. The central bank noted that subsidies and losses of public sector enterprises increased by 10 per cent compared to the previous fiscal year. “To put this in perspective, in FY10 these expenditures, as a percentage of GDP, were almost equal to the combined total budget for health and education,” wrote the State Bank in its report, adding, “this is by no means an acceptable situation”.

The SBP highlighted improvement in real GDP growth which, “rose to 4.1 per cent compared with an anaemic 1.2 per cent in FY09”. The current account deficit, it noted, also narrowed to “only 2 per cent of GDP in FY10 from 5.7 per cent in the previous year”.

The country’s trade deficit also continued to narrow for the second consecutive year and exports grew by a remarkable 9.4 per cent over the previous fiscal year, the central bank said. However, it pronounced conclusively that, “investments fell for the second consecutive year”, and, “all fiscal targets of the government were missed during the year”.

Not out of the woods yet

Inflation is expected to continue in the range of 13.5 and 14.5 per cent for FY11, according to the central bank. This is higher than SBP’s own forecast of 11 to 12 per cent issued earlier.

The central bank expressed the fear that persistent double-digit growth in inflation may be fuelled further by “any weakness in the exchange rate”. It also added that recent 50 per cent hike in government sector salaries, anticipated rise in energy tariffs and removal of GST exemptions to broaden the tax base are also likely to exacerbate the already spiralling prices. The SBP asserted that losses to agriculture, livestock and other sectors have limited prospects of GDP growth for FY11 to the range of “2 to 3 per cent”.

It went on to add that, “according to some estimates, 20 million people have been displaced and are living without shelter, food, clean drinking water and basic health facilities”. Despite international assistance and public support, “the resources available are likely to be quite inadequate against anticipated needs”.

The central bank has warned that immediate attention is needed to improve economic governance and to build social safety nets given the increasing incidence of poverty in the country.

Published in The Express Tribune, October 26^th, 2010.