Pakistan's annual budget has marked a shift in fiscal policy towards growth and away from narrowing the deficit, international credit rating agency Standard & Poor's said on Monday.
S&P still saw the government reducing public debt, despite the switch in emphasis as Pakistan prepares to complete an International Monetary Fund assistance programme by the end of the year.
"The more gradual fiscal consolidation is, however, not expected to reverse the downward trajectory of public debt, which is estimated to fall to 85 percent of GDP by end-June 2004," S&P said in a statement issued in London.
Setting the 2004/2005 (July/June) budget, Finance Minister Shaukat Aziz fixed a fiscal deficit target of 4.0 percent of GDP, with an aim to bringing it down to 3.0 percent by 2007. The deficit for the year ending on June 30 is seen at 3.9 percent of GDP.
The fiscal deficit averaged 7.0 percent in the 1990s but has come down under Aziz's stewardship, encouraged by the IMF which bailed out Pakistan with a standby loan in 2000 and a poverty reduction growth facility a year later.
But after notching up growth of 6.4 percent in 2003/2004, Aziz is looking for expansion averaging eight percent over the next three years by cutting a little bit of fiscal slack, while keeping inflation at no more than five percent.
Looking at the fiscal deficit, S&P raised concerns over the government's political will in raising revenues from a country where there are fewer than two million taxpayers out of a population of 150 million people.
"This slower fiscal consolidation, while partly due to increases in development spending, is also a reflection of the government's inability to increase revenues significantly, notwithstanding the improved economic growth," S&P said.
It said the budget showed the government planning to increase revenue collection by 4.6 percent to 796 billion rupees, but Pakistan's revenue collection is below most other government's carrying S&P's "B" credit rating.
"The government, however, needs to do more to increase its collection, as the current level of gross receipts, at 14 percent of GDP, is lower than most of its 'B' rated peers and the 'B' median of 24 percent of GDP."
The agency called for stronger enforcement and prosecution of tax evasion, and the documentation of Pakistan's large informal and cash-based economy.
"It remains to be seen whether this government has the political will to effect this change, when previous governments had failed."
S&P shared Finance Minister Aziz's concerns over Pakistan's record for implementing projects, noting development spending has been consistently below budget in the past.
Aziz raised the development spending budget by more than 31 percent to Rs 202 billion ($3.5 billion), accounting for 22 percent of gross expenditure --the highest in a decade.
The S&P statement made no mention of an increase of over seven percent in Pakistan's defence budget for 2004/2005.
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