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    Jul 2010

    Default SBP estimates fiscal deficit at 5pc of GDP in FY11

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    KARACHI: The State Bank of Pakistan (SBP) has estimated that the fiscal deficit would be around five percent of the gross domestic product in 2010/11 against the government projection of four percent.

    The central bank in a report on weakening of fiscal position of the country released recently said that the excessive reliance on domestic sources to finance the fiscal deficit shows both the weakening of fiscal position and less-than-expected realisation of projected external financing.

    This position breached the revised fiscal deficit target of 5.1 percent of the GDP in FY10 and provisionally it would stand around six percent, it said. “Provisional figures indicate that the revised FY10 fiscal target of 5.1 percent of the GDP has been breached and could be higher than six percent of the GDP,” the SBP said.

    The central bank said that the budget deficit target has been set at 4.0 percent of the GDP in FY11. “Given an ambitious tax revenue target by the Federal Board of Revenue (FBR), higher requirement of security-related expenditures and a sizeable development budget, reducing the fiscal deficit close to the target level, though imperative, would be quite challenging,” it added.

    Meeting the revenue body’s tax collection target of Rs1,667 billion would require 25.6 percent growth, or a 0.8 percentage point improvement in the tax-to-GDP ratio, which seems unlikely, it said.

    Moreover, the target of 4.0 percent deficit, announced in the budget speech, assumed a 5 percent deficit of the federal government and a combined surplus of 1.0 percent by the provinces. However, consolidated provincial figures reflect almost a balanced budget, it said.

    “This suggests that FY11 fiscal deficit could be around 5.0 percent of the GDP,” the central bank said. Low tax revenues of the government have become a serious concern. Without increasing the resources it would be difficult to sustain the fiscal deficit at manageable levels and ensure adequate development expenditures.

    “Reliance on cutting the development expenditures rather than the current expenditures is only going to decrease investment and productive capacity of the economy,” the SBP said.

    Moreover, higher current expenditures will add to the aggregate demand, putting pressure on the available supplies and, thus, inflation. “To close the gap, there will be a little choice, but to rely on foreign borrowings. Delays or shortfalls in such inflows could put pressure on the external accounts sustainability,” the report suggested.

    Regarding fiscal position in FY10, the central bank expressed concern over low inflows from external sources. “Against the budget estimates of Rs377 billion, only Rs177 billion was received from the external sources,” it said.

    This includes around Rs93 billion provided by the International Monetary Fund (IMF) as a bridge financing for funds pledged by the Friends of Democratic Pakistan (FoDP). The SBP said that the lower revenue generation and higher current expenditures are responsible for the stressed fiscal position. “Despite realisation of non-tax revenues such as Rs109 billion coalition support fund (CSF) and transfer of Rs230 billion SBP profit, the lower-than-targeted tax collection by the Federal Board of Revenue (FBR) may have caused a shortfall of Rs53 billion from the target of Rs1,380 billion for FY10,” the central bank said.

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