Alarmingly high fiscal slippage, at the end of first quarter current fiscal year, casts serious doubts on the talks of economic recovery. The fiscal deficit seems to have easily missed the first quarter target stipulated by the IMF, whereas on revenue front, tax collection targets have not been met either.
These indicators of fiscal overspending, (mainly on current expenditure) constraint the central bank to run money stimulus to kick start the much needed private sector spending, hence output. Excessive domestic borrowing by government is also exerting pressure on demand-pull inflation amid sticky supply.
Moreover, the threats of cost-push exogenous external factors ie hike in international commodity prices are also hindering the monetary managers to enhance liquidity in the system. Thus, inflationary threats amid declining output ie stagflation is a dreadful but natural consequence. The government borrowed Rs 60 billion for budgetary support from SBP, whereas its liabilities for the same head from scheduled banks were standing at Rs 121 billion as of September 26.
Based on historic numbers, at an average of Rs 25 billion per month, the government would have raised Rs 75 billion from National Savings Schemes in the first quarter. This, net-off expected transfer of Rs 50 billion from SBP's profits and other imbursements to the tune of Rs 4 billion, would have reduced the government borrowing from domestic sources to Rs 202 billion. Add to this the estimated fiscal support of $715 million (Rs 59 bn) by the IMF for July-September period, and the government's total fiscal borrowing increases to Rs 261 billion for the first quarter.
Assuming that government borrowing for fiscal support is a reflection of fiscal deficit, to meet government's expenditure over and above its revenue streams, one can roughly estimate that the fiscal gap for the first three months stood at Rs 261 billion. This number, however, does not include the numbers for the last week of September, due to be released later this month.
Compare this number with the IMF's quarterly deficit target of Rs 194 billion, the slippage translates to around Rs 70 billion. What's more worrisome is that this trend is likely to continue in the coming quarters. The US non-military aid (Kerry-Lugar Bill) and other bilateral and multilateral aids to Pakistan are likely to be routed through private sector for development spending, due to inefficiencies in the government machinery and its bias towards current expenditure.
This means, Islamabad's credit line would remain confined to domestic sources and the IMF. In effect, fewer resources will be left for private credit - hampering the revival of industrial sector and in turn the growth of services sector. With virtually no tax revenues from the only expected good performer - agriculture - tax revenues are likely to miss the target, even by bigger margins, in the coming quarters. This threatens to create a vicious cycle of lower output and higher government borrowing.
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ESTIMATE OF GOVT BORROWING
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RS (BN)
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From SBP (as of September 26) 60
From scheduled banks Rs (as of September 26) 121
From NSS * 75
SBP reimbursements and other transfers -54
IMF's fiscal support 59
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TOTAL (for the quarter ending September 2009) 261
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