The Ministry of Finance has projected a budget deficit of 5.6 percent from earlier estimates of 5.1 percent due to lower growth in tax and non-tax revenues - 9.8 percent higher than projected, well-informed sources in the Finance Division told Business Recorder. These projections were made at a meeting of Monetary and Fiscal Policies Co-ordination Board held under the chairmanship of Finance Minister Asad Umar. The meeting reviewed the fiscal and monetary policies besides discussing the external sector.
Finance Secretary Arif Khan who has also served under former finance minister Dr Miftah Ismail and is retiring soon, stated that the government inherited numerous economic challenges that weigh on growth projection of 6.2 percent requiring managed adjustments to correct the underlying imbalances in the economy.
He said that current account deficit has been curtailed to 4.4 per cent during July-December 2019 on the back of increase in workers'' remittances and recovery in exports. However, on fiscal side, the healthy growth in revenue could not keep up the pace due to which the budget deficit target may rise to 5.6 per cent of GDP against earlier envisaged target of 5.1 per cent for the current fiscal year.
The Secretary also stated that headline inflation (CPI) during the first six months (July-December) 2019 increased to 6.05 per cent against 3.75 per cent in the same period of 2018. The inflation indicators suggest that a high impact has come from non-food prices most likely driven by gas price increase since fuel carries a large weightage in CPI basket.
The Board emphasized that fiscal consolidation is a key element of the adjustment plan for ensuring macroeconomic stability. The Board maintained that revenue targets, both on tax and non-tax side, are required to be met and expenditure controls should continue to remain in place. The Board also observed that there is further scope for tightening of the fiscal stance and appreciated the recent participation in the last Pakistan Investment Bond auction.
State Bank of Pakistan (SBP) Governor Tariq Bajwa informed the meeting that M2 in FY 2019 is growing at a higher pace despite significant NFA contraction. Private credit growth momentum is continuing and is explained by increased input prices, contraction of the investment cycle and ample liquidity with banks. Analysis reveals that subsidized and non-subsidized credit to export-oriented sector has increased although slower than anticipated. Minister for Planning, Development and Reforms, Makhdoom Khusro Bakhtiar emphasized the need for analyzing the relationship of interest rate with saving and investment.
The members of the Board shared their views on the interest rate scenario. Some members expressed the need for reduction in interest rates considering the prevailing economic conditions, while others felt that it would be appropriate if the rates continued at the current level. It was however, concluded that the decision in this regard lies with the Monetary Policy Committee of the State Bank of Pakistan which basis its decisions on economic fundamentals.
Finance Minister, in his concluding remarks stated that the incumbent government has opted for gradual adjustments in the economy to undertake structural reforms with the aim of building solid foundations of economic recovery, in contrast to previous policies; and that the incumbent government has chosen the path of investment and export-led growth to be financed by domestic resources to accelerate growth on sustainable basis.
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