The persistent failure of economic managers to bring fiscal deficit within reasonable limits - it jumped to 8.5% of GDP during fiscal year 2011-12 against the original projection of 4% and revised figure of 5.5% of GDP - is a serious cause for concern as it has far-reaching repercussions and ramifications for our economic viability. Since the present government has showed no willingness in taxing the rich and mighty, removing fiscal imbalances and controlling wasteful expenditure, more and more people are being pushed below the poverty line - their total number is now not less than 65 million, if not more.
The bereft nation deprived of even fundamental facilities of life, while the ruling elite is thriving on extraordinary perks and benefits besides corruption, is posing a threat to our stability-both economic and political. The worsening law and order situation has its roots in economic disparities and collapsing of State machinery.
The consolidated fiscal deficit, according to a report, 'Consolidated fiscal deficit going to touch all-time high', published in Business Recorder of 6 August 2012, "is going to touch an all-time high for fiscal year just past largely because of election-specific spending spree by the federal and provincial governments".
Quoting a top official of Finance Ministry, the report claims that Rs 128 billion provincial budget deficit instead of the budgeted surplus of Rs 90 billion has sent yet another shockwave to the economic managers subsequent to failure of Federal Board of Revenue (FBR) in collecting less than budgeted figure.
It is feared that this would increase the consolidated fiscal deficit by around one percent for the fiscal year 2011-12. The report claims that all this forced high-ups of Finance Ministry to put their heads together to limit the consolidated budget deficit to around 8.5%, including 1.9% one-time consolidation of electricity arrears and commodity operations.
According to the report, the budget deficits of Punjab and Sindh governments - each above Rs 50 billion - were unexpected for economic managers in the aftermath of 7th National Finance Commission (NFC) Award shifting major chunk of resources to the provinces.
The important question that emerges in the present scenario is: whether this monstrous budget deficit reflects unrealistic projections of revenue and expenditure by the economic managers or something is fundamentally wrong with their approach towards economic challenges faced by Pakistan. According to many independent economists, the higher than budgeted non-development expenditure and lower than fixed revenue collections have led to massive government borrowing domestically that has not only stopped lending to private sector by banks, but also accelerated inflation.
The banks, they say, are for obvious reasons are lending to the government, with its sovereign guarantees, rather than to the private sector due to fragile economic conditions. Resultantly, there is neither any chance for economic revival nor a room for improvement at fiscal front. Fiscal deficit is considered as 'mother of all ills'. High interest rate, coupled with ever-rising inflation, lack of energy and infrastructure, worsening law and order situation-all are playing havoc with our economy.
The technocrats, appointed by the political government, are just engaged in rhetoric and till today failed to achieve any of the targets fixed for revival of the economy. They have miserably failed to revitalise FBR in the last four and a half years. Resource mobilisation is the key to overcome fiscal deficit, but for the last four years FBR has failed to meet even the budgetary targets, what to talk of taping the real tax potential of Pakistan, which is not less than Rs 6 trillion by very conservative estimates - already presented by us in various columns.
FBR's main reliance on sales tax from importation and supply of POL products and few other commodities and withholding taxes under the income tax regime has proved to be a complete fiasco in meeting the target of Rs 1952 billion - the total revenue collection of Rs 1881 billion for the fiscal year 2011-12 is short by Rs 71 billion. In the fast deteriorating economic scenario, target of limiting fiscal deficit to 6% for 2012-13 would also be impossible unless a comprehensive agenda for resource mobilisation and fiscal discipline is adopted both by the federal and provincial governments.
The Federal Secretary Finance, while confirming the bleak scenario, attributed it to an "unprecedented surge in expenditures in June 2012" that made it "difficult to curtail the budget deficit to the revised estimate of 5.5% of GDP". This revelation from the Secretary Finance came at a time when a furious controversy was going on about the authenticity of figures for the fiscal deficit. Independent economists are raising serious objections about credibility of official statistics as one arm of the government differs with the other - Statistical Division is at war with Finance Division and State Bank is refusing to accept the revenue figures conveyed by the Federal Board of Revenue (FBR).
While the Finance Ministry has yet not publicised the final accounts for fiscal year ending on 30 June 12, critics of the government allege that delay is being caused due to manipulating figures to conceal actual fiscal deficit. The government, on the contrary, insists that delay is on account of continuing strike within the office of Accountant General of Pakistan Revenues.
In the absence of any 'official figures', many experts are predicting fiscal deficit around 8.5% of GDP for FY12. Some are even estimating deficit close to 9% of GDP. They say that in order to bridge the burgeoning budget deficit, at least Rs 1800 billion will be required. The Secretary Finance, however, challenges these estimates and claims, "It would not be fair to include 1.9% of GDP on account of power and commodity sector liabilities [in the fiscal deficit calculation] as it was a notional expenditure that was incurred in the previous year but was adjusted in the books during the last financial year".
Whatever, the actual figure of fiscal deficit ultimately may be, the fact remains that there has been a massive shortfall both in revenue and non-revenue targets in FY12 - there is a huge gap of Rs 71 billion on the part of FBR alone. Then the government could not manage to auction the 3-G licences or secure repayments from the United States under the Coalition Support Fund before June 30, 2012.
As foreign inflows are just drying up, especially those for budgetary support, the government has been left with no choice but to resort to more domestic borrowing to meet finance deficit of over Rs 1.5 trillion. In FY 2012, the bank borrowing was at 4.4% of GDP as against 0.3% of GDP in FY02. There is a general consensus that it is an extremely dangerous economic trend having devastating effect for the banking industry and economy as private sector is getting nothing from banks for running their businesses, what to talk of making fresh investments in vital sectors as energy.
The present government, since coming into power in 2008, is mismanaging everything on the economic front. The President in his speech in the joint session of Parliament on March 17, 2012-first time in the history of the country that an elected President addressed the same parliament for the fifth time-was boastful of what the Pakistan People's Party-led coalition government did in its four years and spoke little about its agenda for economic reforms and strategy to overcome the perpetual and growing fiscal deficit.
Analysing his speech in our column, we warned: "this year, the federal government is heading towards a massive shortfall in achieving its budgeted non-tax revenue target in addition to expected shortfall of Rs 60-70 billion in tax revenues." We further said that "even if Federal Board of Revenue succeeds in collecting target of Rs 1952 billion, the capping of fiscal deficit at 4.7% percent of the GDP is not possible at all".
In the first seven months of FY12, the government collected only Rs 231 billion on account of non-tax revenues against revised target of Rs 677 billion. The target of non-tax revenue was revised downwards from Rs 780 billion to Rs 677 billion. Against this revision on account of non-tax revenues, the government had revised its budget deficit target upwards by 0.7% from 4% of GDP to 4.7% of GDP.
Collection of Rs 446 billion in the remaining months, as predicted by us, was a daunting task due to dependence on unpredictable inflows from the United States in the shape of coalition support fund (CSF) and doubtful and controversial auction of 3G licence. In the budget for 2011-12, the Ministry of Finance projected Rs 119 billion ($1.34 billion) by calculating Rs 84/85 against the US dollar on account of CSF, which was later revised downwards to $800 million. But in March 2012, the Ministry of Finance conceded that they expected only $400 million on account of CSF even after normalisation of relations with the USA and this money was likely to be received before end June 2012, though it never happened!
The result was obvious: domestic debt ballooned to over Rs 7 trillion by end-January 2012, a net increase of Rs 953 billion since July 2011. Of the total figure, the share of treasury bills stood at Rs 2.4 trillion, a third of total debt. Similarly, the share of market treasury bills was slightly over a fifth, standing at Rs 1.4 trillion. Investment bonds made up 12% of total debt as the government borrowed Rs 882 billion through auctions. National savings schemes were the second biggest source of government borrowing. Their share was around Rs 2 trillion, 29% of total domestic debt.
(To be continued tomorrow)