Fiscal deficit may swell to 4.2 percent of GDP

The finance ministry is unlikely to implement the directives of Prime Minister Mohammadmian Soomro for keeping fiscal deficit within the targeted limits, it is reliably learnt. The finance ministry had projected fiscal deficit at 4 percent of the GDP for 2007-08.
The Prime Minister had directed the ministry to constantly review the economic situation to ensure that the growth parameters are not adversely affected. He also asked the ministry to check and manage to keep the budget within overall fiscal deficit targets. However, analysts are of the view that the finance ministry may not be able to keep the fiscal deficit within the projected limits because of freezing domestic oil and electricity prices besides slow growth in revenue.
Analysts say fiscal deficit would be around 4.2 percent of GDP and economic managers are not in a position to contain it. According to the sources the country would be facing huge budget deficit of over Rs 535 billion in FY 08.
"If the government does not pass on the impact of rising oil prices to consumers, it will have to bear an additional burden of Rs 136 billion which will shoot up the budget deficit to 5.4 percent of the GDP," the sources added.
They said Finance Minister Dr Salman Shah had made all-out efforts to unfreeze oil and electricity prices and pass the impact on to consumers in phases with the argument that the caretaker government had no political bias. But the plea had been rejected both at the Prime Minister and the President levels.
The International Monetary Fund has also stressed that further fiscal consolidation would be required to reduce inflation and the external deficit while lessening pressures on real interest rates.
In this regard, IMF Directors have noted the low ratio of tax revenue to GDP and recommended to press ahead with the reforms to increase revenue so that it could reduce fiscal deficit while boosting spending on infrastructure and poverty alleviation. The directors have called for broadening the tax base, through expanding taxation of the agriculture and services sectors and reducing tax exemptions. The Fund is also of the view that there exists need to modernise the energy sector''s regulatory and tariff framework and revive the privatisation process.