The International Monetary Fund (IMF) has forecast a fiscal deficit of 5.3 percent (Reuters corrects on Thursday fiscal deficit outlook to 5.3 percent, not 6.5 percent, and GDP growth outlook to 3.8 percent, not 2.6 percent) for Pakistan for the ongoing fiscal year in its recently released report titled Regional Economic Outlook. The budget for the year specified a deficit of 4 percent of Gross Domestic Product (GDP), which analysts agreed, was unrealistic to start off with for two reasons. First and foremost, the budget envisaged a provincial surplus of 125 billion rupees, a surplus over which the federal government had little or no control. The fact that the two major provinces that were expected to contribute to the bulk of this surplus - Sindh and Punjab - suffered from massive floods and dengue endemic respectively makes it highly unlikely that there will be any provincial surplus. In this scenario, one would have expected the federal government to tighten its own belt in an effort to ensure that the deficit remained sustainable. However, the political government appears to be guilty of omission at best and actual commission at worst of policies that are targeted towards a deterioration of the economy. There have been two major decisions with political overtures with major negative economic repercussions: a 50 percent raise in the salary of the civil servants last year and an additional raise of 15 percent this year at a time when the treasury clearly does not have sufficient resources to pay salaries and pensions (the recent death of the Railway pensioner is a case in point) has contributed to wage-pushed inflation at a time when austerity by all was critical to controlling the general price rise. And second, the decision by the Prime Minister to create four new ministries and divisions at a time when foreign donors are withdrawing budgetary support (with the 117 billion rupees expected under this head highly unlikely) simply defies economic logic. The cost paid by the common man for these two measures in terms of higher inflation is obviously outweighed for the PPP-led coalition government by what it terms is its policy of reconciliation defined as prioritising its deals with its coalition partners that compel it to give a certain number of portfolios to all partners. This is surely an example of the government's profligacy at its worst. Second, the IMF also stipulated in its report that the GDP growth rate for Pakistan would be no more than 3.8 percent. The 2011-12 budget estimates of GDP growth were 4.2 percent. This downgrade in growth is almost certainly likely to have negative repercussions for the amount of tax collected as total taxes collected are a function of the growth rate. Additionally, total expenditure is unlikely to decline - an assumption based on past precedence. For example in 2010-11, even though development budget was mercilessly slashed by around 100 billion rupees current expenditure rose leading to a 136.5 billion rupees rise in total expenditure for the year in comparison to budgetary estimates. Thus with current expenditure accounting for a greater percentage of GDP inflation would rise by much more than 12 percent forecast in the budget. Government profligacy as viewed by the general public labouring under the onus of rising prices and the shrinking domestic rupee value is doubly unacceptable given the ongoing global recession that has compelled even the developed Western economies to tighten their belts in spite of violent and sustained street protests. A three-pronged deal was struck on Wednesday between the Eurozone countries whereby: (i) private banks agreed to accept a 50 percent loan write off of Greek debt, (ii) banks agreed to raise capital to protect them against losses from any future government defaults, and (iii) the Eurozone bail fund to be enhanced to euro 1.4 trillion. It is too soon to tell whether this is enough to deal with the debt crisis. However, the fact remains that Pakistan has neither the access to such large bailout packages nor indeed has the country succeeded in creating an enabling environment for domestic private investment activity. This does not imply that there is no workable solution to our economic woes or indeed that the government is unaware of what the solution is. Reforms as enunciated by many a donor, sector specific reforms as well as macroeconomic reforms, agreed by the government are simply not being implemented for political reasons - inexplicable but unfortunately true. Copyright Business Recorder, 2011
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