Expenses exceed income by Rs274b in 90 days

The country’s expenditure has exceeded its income in the wake of mounting world pressure to tax privileged classes.

ISLAMABAD: The country’s expenditure has exceeded its income by a record Rs274 billion in the first 90 days of the current fiscal year in the wake of mounting world pressure to tax the privileged classes.

Finance ministry sources told The Express Tribune that during the first quarter (July-September) of the fiscal year 2011, the budget deficit has surged to Rs274 billion or 1.6 per cent of the Gross Domestic Product (GDP).

The amount is Rs33.2 billion more than the agreed limit with the International Monetary Fund (IMF) which had earlier asked local authorities to restrict the deficit to 1.4 per cent of the total size of the economy.

The deficit is the outcome of unmet targets in revenue collection and a nose dive in foreign inflows. The Federal Board of Revenue (FBR) has only collected Rs290 billion in taxes in the three months against the target of Rs336 billion – marking a dip of Rs46 billion.

Net inflows during the first quarter stood around $30 million (Rs2.6 billion) due to the blockade of budgetary aid by the World Bank and the Asian Development Bank over the issue of tax reforms and zero releases by the Obama administration owed on account of the war on terror.

In order to finance the yawning gap of Rs274 billion, the government borrowed Rs119 billion from the State Bank of Pakistan – a move dubbed as inflationary as  it renders the central bank’s policy, that revolves around curtailing inflation through making loans expensive, useless.

The remaining amount was borrowed from commercial banks by floating treasury bills, which choked private sector credit.

“In the upcoming strategic dialogue with the United States, Pakistan is going to ask the Obama administration to take a clear position on the issue of disbursement under the Coalition Support Fund, as the unwanted delay is affecting deficit financing plans,” said a senior government official. The US and Pakistan will engage in policy dialogue between October 21 and 22 in Washington.

The Coalition Support Fund covers the expenditures incurred by Pakistan on the war on terror. Total outstanding claims have reached $2.5 billion (Rs215 billion) and the government had earmarked $1.4 billion (Rs120.5 billion) of that money in the current budget to finance the deficit.

Meanwhile, the international community continues to mount pressure on Pakistan to tax its privileged elite instead of looking towards the world for help in case of financial constraints or even natural calamity.

US Secretary of State Hilary Clinton has time and again requested Pakistan to mobilise its resources. The Friends of Democratic Pakistan, an umbrella organisation of countries ‘friendly’ towards Pakistan, on Friday, asked the country’s representatives to raise resources domestically for flood related reconstruction instead of relying entirely on aid.

In a country of 180 million, there are only 1.97 million registered taxpayers. A breakup of tax collection shows that approximately 60 per cent of taxes are paid by the manufacturing sector, one-third is collected on services while the agriculture sector contributes less than one per cent towards total collections, according to FBR data.

Officials say that Pakistan will also take up the issue of delaying the delivery of foreign funds with the IMF during the team’s upcoming visit. The IMF delegation will arrive on October 27 to discuss the option of a second loan programme, imposing taxes on services, withdrawing exemptions and revising the budget in the aftermath of the floods.

“Based on the commitments, Pakistan has to receive an estimated Rs213 billion in external budgetary support and the delay is causing great difficulties,” said the source.

“As a nation we love to spend money and hate to collect taxes,” commented Dr Ashfaque Hassan Khan, the dean of the National University of Sciences and Technology’s business school. He said the numbers indicate the dangerous road ahead as this may result in at least a deficit of Rs1.1 trillion or 6.4 per cent of the GDP. The annual budget deficit target is Rs685 billion or four per cent of the GDP.

Published in The Express Tribune, October 17^th, 2010.