Economic strategy for the rest of the year

The federal government has saved around 60 billion rupees through managing development and current expenditure in the first quarter of the current fiscal year according to well-informed sources in the Finance Ministry. The government, these sources further revealed, released only 50 billion rupees for Public Sector Development Programme (PSDP) against the target of 75 billion rupees in the first quarter. Business Recorder has been unable to verify what development projects were curtailed from the Planning Commission that is still awaiting a formal request from the Finance Ministry before it begins to reprioritise projects based on the lower allocation on PSDP. Subsidies disbursed, sources claimed, amounted to 180 billion rupees against the budgeted target of 196 billion rupees and reducing the discount rate to 12 percent reduced interest payments by 9 billion rupees. There were also claims that defence expenditure has been lower than budgeted though the source did not back it up with actual figures. The question that arises is one of sustainability. It may be recalled that last year budgeted subsidies were 126.6 billion rupees while the revised estimates for the year placed subsidies at a whopping 395.8 billion rupees or 296 billion rupees more than budgeted. The government's inflationary estimate for 2010-12 is 12 percent as against 9.5 percent estimated last year (which was revised upward to 15.5 percent) with food inflation estimated at over 20 percent - statistics that would compel the government to ante up subsidies for political considerations as it was forced to last year. Thus the reduction in subsidies is unlikely to be sustainable for the rest of the year. The reduction in the discount rate has, no doubt, reduced the government's domestic debt repayments. However, it would also negatively impact on savings in the National Savings Scheme that, in turn, would limit the government's access to domestic borrowing, thereby increasing the need for external resources. With Pakistan no longer on a rigidly controlled International Monetary Fund (IMF) programme other multilaterals are likely to limit their disbursements for programme loans (budgetary support). This is a safe assumption given that the Stand-By Arrangement (SBA) with the Fund remained stalled for the entire year and only 39 billion rupees of the budgeted 80 billion rupees of programme loans from external sources materialised. Additionally, the public is well aware that the Finance Ministry was recently compelled by the President to not only release the unbudgeted 9 billion rupees to the energy sector in an effort to deal with the inter-circular debt thereby enabling the critical supply of fuel that in turn would end countrywide loadshedding for a week or so but also release one billion rupees to Railways to enable that monolith to pay salaries and pensions. In short, current expenditure curtailment is unlikely to be sustainable with no policy yet in place to deal with the intractable circular debt or restructuring of state owned entities. Pakistan's major sources of foreign exchange earnings last year were from remittances as well as higher than expected export revenue attributed to a rise in the international price of our major exports instead of an increase in volume. Unfortunately, these trends are not expected to continue into 2011-12 and the balance of payment position is expected to worsen considerably this year with current account deficit in the first quarter of 2011-12 expected to decline to 2 percent of Gross Domestic Product (GDP) in comparison to 1.1 percent of GDP in the comparable period last year. Floods, senior Finance Ministry sources also revealed, have accounted for a cut in the GDP growth rate by 0.5 percent. The 2011-12 budget forecast a GDP growth of 4.2 percent which would imply that growth is now expected to be no more than 3.7 percent. Lower growth would also have implications for tax collections and consequently on the fiscal deficit. The government also expects to receive (i) the 800 million dollars due from Etisalat at last, pending since several years, with no indication as to why the government is optimistic; (ii) revenue from the issuance of Sukuk bonds by pledging national assets like Islamabad-Lahore highway, though it is unclear what would be the fate of the asset if the government fails to pay, which in turn will determine the marketability of these bonds; and (iii) the Finance Minister is expected to hold consultations with international financial institutions seeking ways of tapping foreign resources, a questionable enterprise given the failure of the Finance Ministry to adhere to an agreed reform agenda with the IMF or implement an austerity programme. The economic reform agenda has been formulated after consultations between the multilateral/bilateral donors and the government and until it is implemented our economic woes are unlikely to end anytime soon. Copyright Business Recorder, 2011