SIZE AND TRENDS ON BUDGET DEFICIT

  Total revenue for end of second quarter remained at Rs 332.85 billion (8.2 per cent of GDP) and total expenditures at Rs 398.564 billion (9.8 per cent of GDP) with fiscal deficit reaching Rs 65.714 billion (US$1.13 billion) (1.6 per cent of GDP).

  In 2005-06, Pakistan has to face an overall budget deficit of Rs. 261.6 billion or 3.4% of GDP excluding earthquake effect and if we include earthquake related spending which are Rs.65.8 billion, the size of the deficit reaches at Rs.327.3 billion or 4.2 percent of GDP. This revenue-expenditure gap was financed through external and domestic sources. Out of the gap of Rs. 327.3 billion, financing from external sources is expected at Rs 118.4 billion. The remaining gap of Rs. 208.9 billion is likely to be financed from domestic sources. Within domestic sources, financing from non-bank sources amounted to Rs. 22.4 billion while Rs. 96.7 billion would be contributed by the Banking sources and Rs. 90.0 billion is to be financed through privatization proceeds. Higher deficit tolerance is because of higher development expenditure to augment and strengthen existing infrastructure of the country and unanticipated earthquake related spending which are Rs.66 billion. The government is not compromising long-term goal of fiscal consolidation.

  The 2005-06 budget represents a significant departure from past trends as it did not seek to further compress the budget deficit. The 2005-06 budget deficits, was budgeted to rise to Rs. 318.5 billion or 4.3% of (projected) GDP. However, owing to massive earthquake of October 08, 2005, the government was compelled to enhance the fiscal deficit target of the Federal government to Rs.352.3 billion or 4.6 percent of the GDP, increased from Rs.286.5 billion or 3.7 percent of GDP. The net impact on the fiscal position of the Federal government is estimated at Rs.65.8 billion by the end of March 2006.

 Interest payments as a percentage of total expenditure showed continues declining trend from 20.5% in fiscal year 2003-04 to 19.3% in fiscal year 2005-06—a decrease of 1.2 percentage point. In absolute terms, interest payments increased from Rs. 210.2 billion in fiscal year 2004-05 to Rs. 241.2 billion in fiscal year 2005-06 – an increase of 14.7%. This increase was attributable to less rollover policy. This will help to shorten the budget deficit in the economy as a whole.

  Defense expenditure in fiscal year 2005-06 is targeted at Rs. 241.1 billion as compared to Rs. 211.7 billion in fiscal year 2004-05, an increase of 13.9%. Defense spending as a percentage of GDP has, however, been continuously declining in recent years from 6.0% of GDP in fiscal year 2000-01 to 4.3%, 3.5% in 2003-04 and further to 3.2 percent of GDP in fiscal year 2005-06, respectively. Defense expenditure as a percentage of GDP is targeted to decline further to 3.1% under the 2005-06 budget. This declining trend in the defense budget helps to shorten the budget deficit of Pakistan.

  To curtail the budget deficit, the government faces a trade off in either cutting down on development expenditures or going for increased borrowing. Pursuing the first alternative impedes future growth and debt servicing becomes a long time liability if the second alternative is adopted. In Pakistan growth has become sluggish, the credit worthiness has reduced and the acquisition of further debt has become an issue too. To induce domestic residents to lend to the government, the government has to raise the return to lenders. This increase in interest rates discourages investors from taking up investment projects. This situation has inevitably placed Pakistan in a chronic debt trap where high debt repayments are resulting in declines in investment and growth, and this low growth is becoming a cause for limiting the capacity to service debt and reduce the debt burden.

  The budget deficit could hardly reaches to 4% of GDP as compared to the target of 3.8 % which is fixed for the current fiscal year. The government of Pakistan has decided that not to take any foreign assistance to overcome the budget deficit of 3.2 percent of GDP and plan to use Sukuk. Pakistan current account deficit reaches to 2 billion dollar during the five months as compared to the 130 billion dollar of pervious fiscal year this is because of rice in the international prices and increase in the aggregate demand of the commodity. The other factor which results the budget deficit is increase in foreign direct investment and portfolio investment.

  The budget would be largely met by ensuring substantial revenues and using the Sukuk and Eurobonds founding the SB would have to play an effective role in generalizing the revenues. Pakistan tax–to-GDP rate has to increase, like other developing countries. Adding that leakages in tax collection would have to be plugged to generate more revenue.

  The CBR in the past did not play its role to increase revenue but now the revenue machinery will have to be plugged to generate more revenue.

 

(Muhammad Aamer Shahzad)

 

 

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