In what appeared to be a reflection of the performance of economic team, an official report says that fiscal consolidation achieved in 2009 has been eroding for the last two years.
A report on the country’s fiscal policy, which has been submitted to parliament by the Debt Policy Coordination Office, has warned the economic managers to immediately take “serious corrective measures”. A failure means that “the fiscal outlook is bound to remain fragile in the near term”, says the report.
“Notwithstanding, the fiscal consolidation (reducing government deficits and debt accumulation) witnessed in 2008-09, (it) appeared to be vanishing in the last two fiscal years.” The report has suggested withdrawing subsidies on electricity and introducing reforms aimed at turning around three loss-making enterprises, Pakistan International Airlines, Pakistan Steel Mills and Pakistan Railways.
“The report is a ‘charge sheet’ against the finance minister. Both the minister and finance secretary live in a fantasy world which is neither ratified by the State Bank of Pakistan nor the World Bank as claimed by Prime Minister Yousaf Raza Gilani,” said Senator Haroon Akhtar, member of the Senate standing committee on finance.
He said the finance minister had failed to take timely decisions and things were getting out of control.
In 2009, the budget deficit stood at 5.3 per cent of total size of national economy. This widened to 6.3 per cent in 2010 and 6.6 per cent in 2011. For the current fiscal year, the government has targeted a 4.7 per cent deficit, but the report terms it “optimistic”.
Independent experts foresee a budget deficit close to 7 per cent or Rs1,455 billion. In the first half, the deficit has already swelled to 4.5 per cent.
The report has warned that the yawning budget deficit financing requirements will further limit the prospects of private sector growth and the economic benefits it brings.
It says the current trajectory of fiscal deficit is a recipe for future external account crisis and will fuel inflationary expectations in the economy as it creates demand in the system.
Analysts have already predicted an external account crisis in the next six months to a year, but the finance ministry is ruling out any such adverse outlook.
The report has highlighted another indicator that worsened during the last two years. Revenue deficit – gap between total revenue and current expenditure – that improved to 2 per cent in 2009 also significantly deteriorated and stood at Rs595 billion or 3.3 per cent of GDP in 2011.
“This is an alarming situation and by no means, a sustainable scenario,” warns the report. “The existence of a high and persistent revenue deficit points to the government’s inability to maintain fiscal discipline and encourage austerity measures in order to curtail increasing current expenditures,” it adds.
The report has also hit out at government’s inability to remove untargeted subsidies. It says moral hazards in the form of subsidies have meant that the government is creating debt obligations for financing inefficiency in the economy. This practice needs to be put to a halt by undertaking an aggressive expenditure reform action plan.
The Debt Office has cautioned that power sector subsidies will be even higher in 2012 as compared to the last fiscal year. In addition to tariff differential subsidies, issuance of treasury bills and Pakistan Investment Bonds to repay government-guaranteed power sector term finance certificates (TFCs) will contribute another 1.5 per cent of GDP to the fiscal deficit.
Eliminating energy subsidies through tariff rationalisation will increase inflation in the short term but that is an unavoidable cost to attract investment needed for higher sustainable economic growth, it adds.
Published in The Express Tribune, February 2nd, 2012.
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