See what can trigger economic disaster....

In a previous post  on this Blog, it was observed that the provincial governments in Pakistan are proving themselves to be totally irresponsible by presenting deficit budgets in spite of massive resources being transferred to the provinces after NFC Award. While presenting the views of a member of previous regime’s economic team, it was also observed that presenting a deficit or even a balanced budget in the midst of massive transfer of resources from the center is nothing but the height of financial indiscipline. By doing so, the provincial governments have sown the seeds of perpetual macroeconomic crises, rising debt burden, slower economic growth, unemployment and poverty.

By presenting deficit budget the provincial governments have already created serious financial difficulties for the country. Pakistan’s new fiscal year (2010-11) has dawned with a targeted budget deficit of Rs923 billion or 5.4 per cent of GDP. If slippages on revenue and expenditures were added, this deficit would rise to over Rs1100 billion or 6.5 per cent of GDP. How will the government finance such a large deficit?

This view was further reinforced during Prime Minister’s meeting with country’s economic managers on Friday who have surprised the prime minister, saying a high budget deficit last fiscal and a delay in taking immediate corrective measures have put the country’s financial stability at stake. This may also lead to blocking of foreign funding and depreciation of rupee. According to Express Tribune, the ministry officials told the Prime Minister that the overall budget deficit during financial year 2009-10 stood at an unprecedented Rs909 billion against a revised target of Rs769 billion. It may be noted that announcing the last budget, the government had fixed the budget deficit target at 4.9 per cent of gross domestic product or Rs724 billion. Later, it revised the target to 5.1 per cent but, according to provisional estimates, it ended up at 6.2 per cent. In 2007-08, the budget deficit was recorded at Rs777 billion, equal to 7.6 per cent of GDP.

In 2009-10, the government had also been unable to collect taxes according to the potential because of pressure from various lobbies. Sources said the ministry officials cautioned the PM that if the budget gap was not bridged in the current financial year, foreign donors may suspend release of funds. This, in turn, will mount pressure on the rupee, which may sink to new lows.

In fiscal 2010-11, the government has estimated budget deficit at Rs684 billion or four per cent of GDP on the assumption that provinces will present a surplus budget of one per cent of GDP or Rs170 billion. However, provincial budgets show that they may end up showing a one per cent deficit, suggesting this year too the overall deficit will be six per cent instead of four per cent.

The ministry officials also told the prime minister that the country may need to restrict imports of luxury goods to save foreign reserves in case the donors backed off.

They said inflation has again started increasing and for that matter tight fiscal and monetary policies will remain continue this fiscal year, indicating interest rate may not be reduced.

Sources said the finance ministry also sought support of the prime minister for implementing a reformed General Sales Tax from October 1. After failure to levy Value Added Tax from July 1, the government has given a new slogan of reformed GST but much depends on the support of provinces.