The data on the consolidated fiscal position of the country for the outgoing year is still to be finalised, but initial reports are really depressing. According to certain estimates, the country's fiscal deficit for 2009-10 is likely to be around 5.8 percent of the GDP, mainly because of the substantial revenue shortfall, non-realisation of targeted foreign inflows and negative provincial budgets.
It is now abundantly clear that the Federal Board of Revenue (FBR) has failed to achieve the revenue collection target of Rs 1,380 billion. The shortfall, according to certain sources, could be as much as Rs 65 billion. So far as targeted foreign inflows are concerned, the UAE's Etisalat did not oblige the government, despite its last ditch efforts to convince the company to release at least $500 million of the $800 million remaining proceeds of the PTCL privatisation, before June 30, to contain the fiscal deficit closer to the annual target committed with the IMF.
The UAE firm took the position that it would not make this payment till the transfer of all properties to its name promised by the government at the time of privatisation. It may be mentioned that, because of the delayed legal transfer of land and property titles, Etisalat has been holding back payment of almost $800 million of the $2.6 billion PTCL's privatisation proceeds to Pakistan for almost three years now. Slower foreign inflows from the FoDP also made matters worse during the year.
Most unexpected was the fiscal behaviour of the provincial governments. The federal government had envisaged a fiscal deficit target of 4.9 percent of the GDP at the time of the budget announcement for the year 2009-10, which was subsequently, scaled up to 5.1 percent under the IMF programme. This target was based on the expectation that the Federal Government's fiscal deficit would be around 5.8 percent of the GDP, but a saving of about 0.6 percent from the fiscal operations of the provincial governments would reduce the overall deficit to the targeted level.
Such a premise, however, has proved to be illusory and the provincial governments seemed to have ended up without any surplus. As a result, the target to achieve a saving of 0.6 percent of the GDP from this source is not likely to materialise and the overall fiscal deficit target, set at Rs 763 billion for the last financial year, may actually turn out to be closer to Rs 870 billion or a little over 5.8 percent of the GDP.
Although official provisional data on fiscal accounts for FY10 are likely to be available only after July 15, yet the above preliminary calculations making rounds in various circles appear to be based on reasonably solid grounds. For instance, the tiff with Etisalat is no more a secret, the FoDP has not disbursed the promised assistance, the FBR has failed to achieve the tax collection target of Rs 1,380 billion during 2009-10 and there was no attempt on the part of the provincial governments to realise the gravity of the fiscal situation and act accordingly.
The country may have some valid reasons to miss the fiscal target by a huge margin of over Rs 100 billion, or nearly 0.7 percent of the GDP, but the consequences of this failure are really going to be alarming. The IMF would give a tough time to the Pakistani authorities for missing an important performance criteria agreed earlier under the Stand-By Arrangement. The present programme may not be derailed due to the highly sympathetic attitude of the world community at this point of time, but the credibility of the country would certainly be eroded further. Larger recourse to bank borrowings to finance higher budget deficit has accelerated the growth rate of the money supply, which is likely to push up the inflation rate in the coming months. The exchange rate of the rupee is also coming under increasing pressure, due largely to fiscal lapses.
The overall scenario is likely to force the State Bank to maintain a tight monetary stance and keep the interest rates at high levels. The most worrying aspect is that we are still not prepared to attune our fiscal policy to the new realities. The country is almost in a state of war, but no section of society or sector of the economy is prepared to pay its due taxes.
In fact, demands for exemptions or avoidance of taxes is pushing down the tax-to-GDP ratio further. Provincial governments do not make any efforts to mobilise the higher level of revenues and the recent NFC award seems to have made them more complacent. Our friendly countries admire us day and night for our courage to fight terrorism, but their financial contribution to our effort is not significant. All of this must change and soon, if we want to stabilise and rehabilitate the economy. The estimated fiscal outcome for the outgoing year should be a warning signal for the authorities to rethink the fiscal strategy more realistically and particularly, in a way that our dependence on foreign sources to finance the budget deficit is reduced to the minimum over time.