With every passing day amid hindrance and lack of political economic will to bring fiscal reforms, the budget deficit seems to be widening and the lack of funding sources is making the government rely more and more on domestic banking sources, which is building inflationary expectations.
On the other hand, supply side shocks owing to floods and poor administrative measures amid rising global commodity prices, especially crude oil, are fuelling inflation. Inflation averaged, for the first five months of this fiscal year, at 14.4 percent versus the revised SBP yearly target of 13.5-14.5 percent.
The fiscal deficit for the first quarter stood at 1.62 percent of GDP which on an annualised basis misses the full year target of 4.7 percent of GDP by 178 basis points. The major culprits were revenue shortfalls and overrun of subsidies against the budgeted amounts. While on the financing side, less than expected foreign flows overburdened the borrowing from the central bank.
The dismal fiscal summary depicts the three factors that are plaguing the economy. Low tax-to-GDP ratio responsible for shortfall in revenues, circular debt causing overrun in subsidies and never ending load shedding, and third is note printing in consequence; to fill the fiscal gap which is adding to inflation woes.
Good governance is a partial answer to the problem and the complete solution lies in policy reforms. The capability of government will automatically be generated with good governance given the skill set of private sector and brains being imported by the country.
Noise of RGST is a leg of policy reforms that has the potential to bring significant changes in the landscape in the medium to long term given that implementation reforms, also concurrently take place.
Nonetheless at this point these requisite changes look like a distant dream with a hope that institutional building will start picking pace. Realistically, RGST, if implemented, in the short run, along with the flood tax may not be able to generate more than Rs 40-50 billion in the second half of this fiscal year.
The recent round of negotiations of Mr Shaikh with Sharif brothers might not reap fruits. Similarly, Cameron Munter's visit to Nine Zero might not have convinced the MQM on RGST.
Hence, the fate of RGST, in the near future, remains in doldrums and so do the hopes of getting the remaining IMF tranches. The IMF board meeting on December 17 in all likelihood will not consider the case of Pakistan, and getting an extension on the IMF programme scheduled to be terminated by December end seems inevitable.
Nonetheless IMF's remaining $3.6 billion of standby arrangement will keep on haunting the MoF. They now have to look at alternate avenues to fill the fiscal appetite.
Government is eying part of the $2.5 billion of pending Coalition Support Fund. In this regard, $110 million have already been disbursed while the government is expecting $740 million more to come by December end. It will be followed by the Sukuk issue where the government is expecting to raise Rs 80 billion out of which Rs 52 billion has already been confirmed, according to sources close to government.
Then, the finmin is confident of generating Rs 51 billion budgeted from the issuance of 3G licence to cellular companies. However, the feeler from telco representatives suggests otherwise as their sponsors are reluctant to route more funds in a saturated market. And, even if they do so, the likely chance is to go for 3.5-4G which is the latest technology.
In a nutshell, the government may generate foreign funding to the tune of Rs 150 billion from Sukuk and CSF in a month or so. However, that would not be sufficient to plug the fiscal slippage as the deficit may be a little over 6 percent of GDP and the slippage from the budgeted 4 percent come around Rs 340-350 billion.
The rest of Rs 200 billion in the absence of RGST and in turn IMF's budgetary support will fall on domestic banking sources. The high powered money creation may continue and the SBP may also keep pressing the monetary tightening button amid upward moving international oil prices.
MONEY AGGREGATES:
The money that went into the cash economy of cattle market seemingly started coming back right after the first working week of Eid. The currency-in-circulation declined by Rs 31 billion for the week ending November 27. It is likely that more money would have reverted in the subsequent weeks.
The demand and time liabilities rose by only Rs 17 billion for the week in question, as both NDA and NFA exhibited a marginal decline. Overall money supply fell by 0.24 percent or Rs 14 billion.
Fiscal borrowing has shown some signs of easing; however, it has a marginal impact on the central bank borrowing. Private sector continued picking credit, with Rs 17 billion being raised last week made the last six months borrowing at Rs 124 billion. (Feedback at ali.khizar@br-mail.com)
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KEY MONETARY AGGREGATES AS ON NOV 27
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Rs (mn)
27-Nov 19-Nov Change
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Currency in Circulation 237,724 268,779 (31,055)
Total Demand & Time Deposits 25,690 8,619 17,071
Broad Money (M2) 264,780 278,778 (13,998)
NFA 68,479 70,227 (1,748)
NDA 196,299 208,553 (12,254)
Net Government Borrowing 280,000 318,067 (38,067)
Borrowing for budgetary support 309,321 341,850 (32,529)
from SBP 251,310 265,525 (14,215)
from scheduled banks 58,011 76,325 (18,314)
Commodity operation (30,712) (25,179) (5,533)
Credit to non-govt sector 27,535 8,980 18,555
to private sector 51,485 34,075 17,410
to PSEs (24,697) (25,854) 1,157
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Source: SBP
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