The message from the central banks latest report is clear: Pakistans economy is caught in a sandstorm. Central to the plethora of issues highlighted by the bank is the widening gap between the governments revenues and expenditures.
The State Bank now sees full-year fiscal deficit at 5~5.5 percent - higher side of which could potentially turn the countrys relationship with the IMF sour, as the IMF is not expected to give a levy of more than 0.3 percent on elusive friends support.
But if the IMF raises concerns, pat will be the reply from finance ministry: the countrys current expenditures are rigid, no thanks to defence, debt servicing, and of course the security related expenses in the wake of war against terrorism.
A prognosis based on SBPs post mortem suggests the situation isn going to be sanguine any time soon.
Overruns in current expenditure account have led to substantial cuts in development spending, and if foreign pledges don materialize, which appears to be the case at the moment, the government will have little choice but to cut development expenditure again.
Pakistan, therefore, desperately needs foreign inflows, and quick. That, however, hasn been the case. The strategic dialogues recently held with the United States hasn led to anything substantial, except may be the hype of warmer relationship.
On the other hand, the so-called friends haven been acting friendly despite their commitments made directly to the IMF. In the meanwhile, FDI inflows have been falling in the face of slowing growth in remittances and gradual deterioration in trade imbalance in the second quarter.
So it comes down to implementing a blend of measures to get out of this vortex. One, put VAT into action, two, start taxing farming income and three, cut down the non-rigid component of current expenditures. Sadly, all the three options seem undoable, or unfruitful, at the moment.
Reports suggest that the Federal Bureau of Revenue isn prepared to roll out VAT in the coming budget due to technical difficulties, whereas provincial legislatures are also dilly dallying over the matter.
As for the tax on agriculture income, there will likely be many a slip between the cup and the lip, given the not-so-strong will of the lawmakers proven time and again in history.
And, even if they are implemented, what are the chances that they will bear fruits. "While tax reforms are most readily legislated during times of economic stress, this is also the period where the revenue impact of reforms is most limited," the SBP aptly pointed out earlier this week.
Likewise, the fate of proposed reduction in government expenditures looks dicey. It has been months since former finance minister Shaukat Tarin announced the austerity plans. But, just as most plans, little or nothing has been executed so far, except for the departure of Tarin from his office.
This dangerous fiscal status quo makes the job of Tarins replacement, Hafeez Shaikh, very demanding. Amid low savings at home and falling foreign inflows, Shaikh must act pronto.
If Pakistan must avoid another round of IMF financing, public sector entities must be turned around and sold off to raise money for the government, while raising money through other transactions, such as the sale of OGDCs shares.
Unless that happens, and until Pakistans Friends come to help, chances are that private borrowers, who have already been shoved out by the twin devils of circular and commodity financing debts, will stay on the sidelines.
Indeed, the state of economic recovery is fragile, and that too being built on dreadfully brittle infrastructure.
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Projections of Major Macroeconomic Indicators
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FY 10
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Annual Plan SBP
FY 09 Targets Projections
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growth rates in percent
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GDP 2.0 3.3 2.5 - 3.5
Average CPI inflation 20.8 9.0 11.0 - 12.0
Monetary assets (M2) 9.6 - 14.5 - 15.5
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billion US dollars
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Workers remittances 7.8 7.0 8.0 - 8.5
Export (fob-BoP data) 19.2 19.9 18.7 - 19.2
Imports (fob-BoP data) 31.7 28.7 30.5 - 31.0
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percent of GDP
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Fiscal deficit 5.2 4.9 5.0 - 5.5
Current account deficit 5.3 5.3 3.2 - 3.8
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Source: SBP
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