IMF'S REVISION OF BUDGET DEFICIT

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
May 18 - 24, 2009

In a recent meeting of authorities of IMF and Pakistan, it was decided to keep Pakistan's budget deficit target for financial year 2009-10 at 4.6 percent of GDP in order to 'protect priority expenditures'. This revision would give a needed fiscal space to expenditures-laden government, which has however been ensured to receive donations for 2009-10 and 2011-12 from donors participated in Donor's conference in Tokyo, in addition to score of funds under multilateral financing programmes. The revision of budget deficit target from earlier 3.4 percent was vindicated because of lower revenue collection in the ten months of (July-April) current fiscal year that would make annual revenue target unattainable, leaving Pakistan exposed to substantial revenue-expenditure shortfall.

IMF welcomes pledges made in donor conference in Tokyo, saying it would provide Pakistan 'scope for countercyclical policy'. The discussion was concluded in Dubai on the eve of second review of IMF's $7.6 billion (SDR 5.169 billion) SBA, two tranches of which $3.1bn and 847mn were made since November 2008. The US-led lender says the relaxation would increase social development, security spending especially on rehabilitation of internally displaced persons and boost growth. "It is to provide for additional spending associated with donor support of up to 1.2 percent of GDP."

While target increment is a welcome step in the wake of rising appetite of expenditures in various social and economic sectors of the country, it is beyond a common sense that heavy foreign financial supports would not bridge budget deficit in upcoming financial years and that they would not offset revenue shortfall. The pledges for example made in Tokyo are if materialized to support greatly government's 'medium term revenue' efforts. Sceptics say military expenditures rather than pang of social inequality are the underlying important reason of massaging deficit for the next year, seeing extraordinary rise in the defence spending on security measures following military offensive in Malakand and adjoining areas in the country.

The outlays for maintaining security would continue to dominate other priority expenditures including spending for social development or expansion of social safety net, they said. Due to ongoing military offensive in Malakand Division, defence expenditures are rising and making government to offset the additional military budget and defence expenditures increased by 60 percent, said a senior tax official while talking to newspersons. Government set budget deficit of Rs562 billion for the financial year 2009.

Discouraging prospects of annual revenue collection, no privatization proceeds, and sluggish disbursements of multilateral programmes financing during the year made the revision realistic. These factors enhanced the essentiality of underscoring ambitious shortfall expectation for the next year. In other words, fiscal consolidation was sought through the relaxation, according to the IMF. Most of the agreements reached during the discussion were indicative of adherence to structural adjustment programme decided at the time of approval of SBA. Further, it is a continuation of sort of direct approach to expand social safety net. It was agreed in the meeting to rationalize subsidies on electricity tariffs and petroleum products without hurting the social protection programmes. Upward revision of electricity tariffs, for instance, is not applicable for lifeline consumers consume not above 50 units. The benchmark is though questionable.

Some special social programmes started by this government were supported in the discussion. The outreach of income support programme in which Rs1,000 per month is allocated for a family would be expanded. There are many who criticize the effectiveness of such programme in building self-sustainability in vulnerable class of the society. Firstly, notwithstanding the peanut size of the prop it will increase dependability of the people on the state wealth. Secondly, it cannot be a long lasting solution to alleviate poverty. Thirdly, and most importantly, how broad and far-reaching can this support network become in a situation where half of the population is feared to have befallen under poverty line.

DIRECT APPROACH TO REDUCE POVERTY

Despite these reservations, proponents favour the programme saying it is partly 'supplementing' income of low-income group if not diametrically. In many developed nations, there are unemployment allowances to ease impacts of economic problems on society. Spending on social sectors like education, health, etc. and other human development sectors with growth potentialities is a more direct approach to reduce poverty. Since the outcomes of spending on these sectors surface in long term, successive governments did not bother to include them in priority development areas. This has been evident in minimum allocations in annual budget for education and health and infrastructure over a time.

With low tax to GDP ratio and scarce non-tax revenue sources, state functionaries make foreign components essential element of development projects. Therefore, minimum allocations are associated with insufficient revenue or foreign outlays with limited and focussed coverage spheres. Compared to previous time zones, the juncture, this government is reigning, is different in terms of interests foreign nations behold regarding the future of Pakistan. Translating in to donations and approval of loans from IMF, World Bank, ADB, and regional banks, the interest bespeaks country's importance. For Pakistan, this can become an opportunity of no precedence. Now, government may utilize additional funds to revive priority expenditures for social and economic uplifts. International financing should be mobilized to build socio-economic sectors in the country. The disbursements can cushion government financing and shorten gap in revenue and expenditures. Relaxation of budget deficit will create fiscal space to expand spending on inclusion of deprived segments of the society in the mainstream without perhaps adopting measures that could drag people in to poverty trap. Simultaneously, government should entrench revenue sources. Easy money such as petroleum development levy, which gives relief to the government with unmet revenue as it plugs hole in revenue pitfalls and that government is no mood to withdraw too in the next fiscal year, militates against the social protection initiations. Thus, government looks ahead to envelop sectors untaxed and undeserved sacrosanct to generate revenue.