The government has projected economic growth at 4.2 percent of Gross Domestic Product (GDP), and inflation lower than 12 percent for fiscal year 2011-12, sources close to Finance Minister told Business Recorder here on Tuesday. Growth statistics for the current year failed to reach the budgetary targets: growth was projected at 4.5 percent at the start of the current year, with only 2.8 percent expected to be achieved by the end of June this year.
This, analysts argue, would compromise the credibility of the projections for the forthcoming fiscal year. National savings are being forecast to jump by 3.6 percent--from 11.3 percent of GDP as per revised estimates in the current year to 14.9 percent in 2011-12. Investment is being forecast to increase by 5 percent (from this year's revised estimate of 11.6 percent of GDP to 16.6 percent), and consumption is set to decline by 4.2 percent (from this year's revised estimate of 94.6 percent to 90.4 percent). Actual, as opposed to revised forecasts for the current year with respect to savings, investment and consumption were 13.7, 11.6 and 91.1 percent, respectively, thereby showing considerably poorer actual performance.
The public debt-to-GDP ratio is expected to fall in the range of 50 percent over the medium term (this also includes repayment of IMF Stand-by-Arrangement loan). The government will introduce revenue mobilisation measures, including 'reformed GST', to increase FBR's tax-to-GDP ratio to 9.7 percent from the current 9.1 percent. The government will also introduce expenditure management policies, notably removal of subsidy on oil, elimination of subsidy on tariff differential on electricity over medium term, targeted food subsidies and policy to address the issue of surplus staff after the transfer of function to the provinces.
Sources said that revenue target will be around Rs 2.1 trillion, of which FBR tax would generate Rs 1.952 trillion, and non-tax revenue would generate Rs 637 million. They said that the Finance Ministry is to earmark Rs 442 billion for Defence, Rs 108 billion for pensions, Rs 221 billion for federal government service delivery, Rs 135 billion for subsidies, Rs 54 billion for grants to provinces, Rs 289 billion for grants-others to provinces, Rs 270 billion for Public Sector Development Program(PSDP) and Rs 11 billion for net lending. However, no amount has been earmarked for flood relief assistance.
The biggest challenge to the economic stability remains the fiscal deficit which, in the aftermath of floods, was projected at more than 8 percent of GDP, as compared to 4 percent targeted in the budget for 2010-11. The inflation is expected to remain close to around 15.5 percent this year.
The main factors contributing to increased deficit are: slow economic growth, non-implementation of 'reformed GST', high electricity subsidies, increased interest liability due to higher interest rates, lower dividends and non-realisation of proceeds from the sale of 3G telecom licence. It is now estimated to close at 5.5 percent, which is significantly below the level of 6.3 percent of GDP achieved last year.
Sources said that the Finance Ministry has projected fiscal deficit at 4.5 percent of GDP in 2011-12, and thereafter to be further reduced by 0.5 annually. The tax-to-GDP ratio, estimated at 9.1 percent during the year, would be raised to 10.3 percent over the next three years.
Gradual elimination of tariff differential subsidy on electricity (estimated at Rs 186 billion during the year), of other untargeted subsidies (estimated at Rs 43 billion during the year) and zero net financing from SBP has been proposed.
The Finance Ministry has also proposed to continue ban on new recruitment (due to surplus staff from devolution process) and purchase of durable goods (due to surplus durable goods from devolved ministries), rationalisation of fuel entitlement, travelling allowance and expenditure on stationary and newspaper periodicals; establishment of an independent commission to scrutinise all development and current expenditure with a view to ensuring their necessity, efficacy and value to the public exchequer. The recommendations of the commission will form the basis of economy and measures in public spending and establishment of an independent commission to examine the structure of pay and allowances across the public services to bring equity and fairness across them.
Sources said that due to high fiscal deficit and current depreciation the public debt has almost doubled in the last five years. This year, the federal government will pay 58.5 percent of its revenue (ie revenue after transfer to the provinces) as interest. This leaves considerably less amount for public services and public investment. The public debt to total revenue has reached 400 percent, which is the highest in the emerging markets. To resolve the issue of high public debt, the government intends to adopt debt sustainability policy which, among other measures, recommends fiscal tightening over the medium term and review short-term debt maturity profile.