Pakistan has been grappling with a budget deficit especially for the past six or so years that many economists inside and outside the country regard as unsustainable. The PPP-led coalition government inherited a 7.6 percent deficit that it was forced to acknowledge was simply untenable without International Monetary Fund (IMF) support after the democracy dividend proactively promoted by President Asif Ali Zardari did not yield the desired results. And the major responsibility for the deficit escalating to unsustainable levels rested with heavy subsidisation by the Musharraf-led government to the oil and power sector for what was considered as political compulsions.
Five budgets presented by the PPP-led government indicate that subsidies specifically to the power sector were grossly underestimated in each year's budget. 2011-12 budget documents indicate that for fiscal year 2010-11 only 84 billion rupees was budgeted as subsidy to Wapda/Pepco and 3.3 billion rupees for KESC; however, the actual subsidy for the two was 296 billion rupees and 47 billion rupees respectively. Last year, the government budgeted 122.7 billion rupees for Wapda/Pepco and 24.5 billion rupees for KESC but actual outlay at the end of the year as indicated in the 2012-13 budget documents was 419 billion rupees and 45 billion rupees respectively. In the current fiscal year the budgeted amount for Wapda/Kesc was 134.9 billion rupees, which has already been exceeded by over 100 billion rupees, and 50 billion rupees for KESC which appears to be a more realistic figure if past releases to KESC are taken into account. With three more months to go before the end of the current fiscal year, the actual amount of subsidies to the power sector would depend on the caretakers and there is evidence to suggest that there are demands for heavy continued subsidisation to the power sector to ensure that loadshedding does not play a role in the elections 2013.
Be that as it may, there is also evidence to suggest that all the political parties were on board, particularly PML (N) and Pakistan Tehreek-i-Insaf, prior to the announcement of the 14-member cabinet by the Caretaker Prime Minister Khoso. And therefore one would assume that the requested amount by the relevant ministry of more than an additional 100 billion rupees simply to enable Pakistan State Oil to import fuel is likely to be released, which in turn, would have major repercussions on the budget deficit.
Fiscal deficit has to be met through three sources. Bank & non-bank borrowings and forex loans. Already servicing of existing debt consumes the single largest portion of the budget. Persisting with large deficits means more loans with the additional cost; leaving very little to expenditure on social sectors as well as on infrastructure. Dwindling expenditure on these two vital sectors has a direct adverse impact on the economy. Investment dries up due to shortage of skilled labour and crumbling infrastructure increases the cost of doing business. The gap between aggregate demand and production known as the output gap leads to more imports. To pay for these additional imports, country needs to export more. And, to remain competitive it has to depreciate its currency to overcome the inflation differential between prices in the country and in competing countries, as well as with trading partners. One gets into dog chasing its tail syndrome. More one depreciates the currency - there is added pressure on prices. As such, keeping the fiscal deficit below three percent is ideal. Between three and 4.5 is livable. Structural reforms are needed to lower the fiscal deficit and to remain economically independent. Our lack of it is going to cost us our sovereignty.
The question then is what would be the actual deficit by the end of the current year? While a lot would depend on what the caretakers do particularly in terms of subsidies as well as diverting development budgets in support of current expenditure as has been the past practice, yet no one expects the budgeted deficit of 4.7 percent to be achieved. In fact even when the then Finance Minister Dr Hafeez Sheikh, announced this figure it was widely dismissed as unrealistic.
The Ministry of Finance in its budget strategy paper released in the first quarter of 2013 had presented an upward revised estimate of 6.5 percent and few regard this as realistic. What surprised many economists was Deputy Chairman Planning Commission Dr Nadeemul Haq's dismissal of this statistic, in a letter to the Ministry of Finance, in which he estimated a budget deficit of over 8 percent or higher than what was inherited by the PPP-led government. Unfortunately, however, though the latest figures indicate that actual deficit may be closer to 9 percent especially if one takes note of the demand for higher subsidies by the Water and Power Ministry and the likelihood that this may be released by the Finance Ministry. This is simply unsustainable and this fact alone is likely to compel the next government to go for another IMF package with its consequent impact on inflation and quality of life. In short, the task of the next elected government to turn the economy around will be even more of a challenge than when the PPP-led government completed its tenure.
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