Tax revenues likely to fall short of target

The State Bank of Pakistan on Monday said that tax revenues are likely to fall short of the stipulated target and weakening of domestic and global environment can also increase the stress on Pakistan''s banking system. Identifying the risks and challenges, the SBP in its monetary policy statement said that despite considerable improvements in the external sector, its outlook remains a major source of concern.
Not only the export performance is expected to suffer but any deviation from the expected financial inflows could send tremors to the rest of the economy, the SBP pointed out. Adding that the risks for such deviations mostly emanate from the deepening global recession and domestic politico-economic environment.
The SBP predicted that in the wake of a considerable slowdown in domestic real economic activity, tax revenues are likely to fall short of the stipulated target, which may lead to fiscal slippages in the absence of rationalisation in current expenditures.
Missing the revenue target may affect development spending and does not bode well for the country''s considerable needs for investment in infrastructure, the SBP said. A related risk, given that further expenditure cuts may not be possible, is of a rise in the budget deficit and its financing through domestic borrowings. This may translate into crowding out of the private sector credit with renewed risk of inflation persistence.
It is now certain that the global economy is bound to see a contraction in 2009. What is more important is to assess the extent of this decline, particularly in the major economies such as US, UK, Euro-zone and Japan, and speed of economic recovery.
Although unprecedented monetary and fiscal stimuli have been announced, their benefits have not yet materialised. If response of the real economy in these countries remains muted and if financial intermediation does not pick up to normal levels, the impact on the global economy could be much higher. Consequently, the adverse effect on Pakistan''s economy through trade, remittances and financial inflows could be much more than expected today.
The persistence of the global recession and credit market imperfections are likely to impact firms'' capacity and propensity to invest globally, the SBP said, adding "this might reduce the chances of future investments in Pakistan and retrenchment in existing business activities."
With increased risk averseness of foreign investors, the adverse impact on financial flows may turn out to be much higher than expected earlier. Despite some modest improvement in the perceptions of Pakistan''s sovereign debt, the risk premium is still very high, the SBP pointed out. The immediate implication of adverse external developments is likely to be reflected in domestic financial markets and reduced flows in both the markets could put pressure on domestic interest rates and exchange rate.
It also increases the risk of reducing the availability of credit for private sector. Moreover, the dependence of the government on domestic financial markets could increase significantly, the central bank said. SBP pointed out that with higher credit concentration among few sectors, particularly textile, any sharp setback to textile sector might result in further rise in NPLs.