The budgetary balances of the provinces depict a rather different picture than portrayed by the government in the budget.
The provinces are now projecting a combined deficit of Rs44 billion for fiscal year 2011 against the initial estimates of a surplus of Rs167 billion, according to an analyst on Thursday.
The recently announced provincial budgets depict a “U-turn” to what the federation has assumed for provinces in its fiscal year 2011 budget as three provinces – Punjab, Sindh and Balochistan – have budgeted a combined deficit instead of a surplus, said KASB Securities analyst Hamza Marath.
Risk to overall fiscal targets
This could take the estimated consolidated deficit to Rs896 billion (5.2 per cent of GDP), from the government’s initial estimate of Rs685 billion (four per cent of GDP), said Marath in his research report.
Consolidated deficit is the total of the federal and provincial shortfall.
However, with IMF ceiling at four per cent of GDP on consolidated budget deficit, the government would have to cut federal expenditure to remain within the target, said Marath.
Share of domestic sources in the government deficit financing could increase to 79 per cent (Rs710 billion) from 73 per cent (Rs499 billion).
Provisional numbers depict FY10 deficit up to 5.8%
Interestingly, the latest news flow suggests that fiscal year 2010 consolidated fiscal deficit has also exceeded the target by 0.6 per cent of GDP to 5.8 per cent (Rs870 billion) mainly because of provincial deficits, said analyst.
The government had envisaged a consolidated fiscal deficit of 5.1 per cent (Rs763 billion) of GDP under the International Monetary Fund (IMF) programme based on the federal government fiscal deficit of 5.8 per cent and a surplus on provinces part to the tune of 0.6 per cent.
However, due to a mix of factors including shortfall in FBR revenue, lower-than-expected foreign inflows (notably FoDP) and energy shortages, fiscal targets could not be achieved.
While the final official numbers are not yet disclosed, IMF targets on fiscal deficit and government borrowing from the central bank are at a risk.
Distorted macro targets
In a scenario where the government is unable to cap consolidated fiscal deficit at four per cent, there could be a risk to macro and monetary environment.
If deficit shoots up to 5.2 per cent coupled with shortfall in external inflows, the market could demand higher yields on government paper.
Moreover, higher fiscal deficit and domestic demand pressures could also push inflation moderation forward raising the risk of a policy rate hike.
Published in The Express Tribune, July 9th, 2010.