TUESDAY MAY 24: Government struggling to adjust fiscal year 2012 fiscal deficit target: proposal rejected by IMF

ISLAMABAD: The government is reportedly struggling to adjust the fiscal deficit to 4 percent of the GDP, subsequent to International Monetary Fund (IMF) refusal to support 4.5 percent budget deficit, and may reduce for this proposed the Public Sector Development Program (PSDP) size by Rs 103 billion for the next fiscal year, it is learnt.
Source said that the government may delay announcement of budget, for the next fiscal year, till June 11, 2011 to explore the options for revenue mobilisation and objectively review the budget strategy paper. They said that options are limited for the government and it may propose to slash development expenditure for next fiscal year.
The provinces may be persuaded to reduce the consolidated size of the PSDP to create a fiscal space of Rs 103 billion to adjust the fiscal deficit to 4 percent of the GDP for 2011-12. The consolidates PSDP size for the next fiscal year is Rs 710 billion--Rs 280 billion federal and Rs 430 billion provincial--which may be reduced subsequent to the International Monetary Fund's (IMF) refusal to support a fiscal deficit of 4.5 percent of GDP, as proposed by the Pakistani team.
The government would have to either increase revenue or reduce next expenditure to bridge 0.5 percent of Rs 103 billion. The IMF suggested 3.5 percent of GDP or, in absolute terms, Rs 722 billion. Finance Ministry officials maintain that the two sides agreed to a fiscal deficit of 4 percent of GDP or Rs 825 billion for the next fiscal year against 4.5 percent or Rs 928 billion proposed by Pakistan.
The economic managers have worked out 4.5 percent fiscal deficit on the premise of revenue mobilisation of Rs 1950 billion for the next fiscal year including Rs 254, or 16 percent growth over revised target of Rs 1588 billion for current fiscal year, Rs 72 billion from reforms in sales tax and recovery of Rs 36 billion by taking administrative measures.
Sources said that the IMF was not supportive of 4.5 percent fiscal deficit because this huge gap in revenue and expenditure was conflicting to 12 percent target of inflation for the next fiscal year. The IMF viewpoint was that Pakistan would not be able to contain inflation at desirable target of 12 percent with 4.5 percent fiscal deficit and must curtail the fiscal deficit below 4 percent and minimise other borrowing from the banking sector.
A participant of the meeting said that the IMF has conveyed to the economic team that it would be closely watching the measures proposed by the government in the next budget to address their concerns and may be prelude to the success or failure of next round of talks expected with the Fund in July 2011.