PROVINCIAL BUDGETS-FROM SURPLUS TO DEFICIT

AMANULLAH BASHAR
(feedback@pgeconomist.com)

July 12 - 18, 2010

Three out of five provinces - Punjab, Sindh and Baluchistan - have budgeted a combined deficit to the tune of Rs44 billion as against initial estimate of Rs167billion surplus.

Actually, the combined budgetary balances of provinces depict a rather different picture than that portrayed by the federation in the federal budget. In fact, the recently announced provincial budgets depict a "U turn" to what the federation has assumed for provinces in its financial year 2011 (Jul-Jun) budget.

The provinces are now projecting a combined deficit of Rs44billion for financial 2011 as

against initial estimates of a surplus to the tune of Rs167 billion. In this backdrop, the consolidated deficit including federal and provincial seems to have swelled to Rs896 billion that is 5.2 per cent of GDP compared to initial estimate of Rs685billion which was 4.0 percent of GDP.

The financial analysts were of the opinion that in case the deficit shoots up to 5.2 per cent coupled with shortfall in external inflows it may result in higher inflation rate as well as increase in interest rate as well.

The government, it may be recalled, had envisaged a consolidated fiscal deficit of 5.1 per cent (Rs763billion) of GDP under the IMF program based on federal government, fiscal deficit of 5.8 per cent of GDP and a surplus on provinces part to the tune of 0.6 percent of GDP.

However, due to a mix of factors i.e. shortfall in FBR revenue Rs1.33 trillion against target of PRs1.38trillion, lower than expected foreign inflows especially from Friends of Democratic Pakistan (FoDP) and energy shortages, fiscal targets could not be achieved.

In fact, the situation calls serious efforts to economize their resources and learn to live within their means for the same of the economy, people and the country. The only way out is to cut down prince like expenditures on traveling and maintaining protocol and status.

Energy crisis on one hand is adversely affecting economic growth while rising cost of energy is disrupting the kitchen budget of the poor and middle income groups, which calls development of domestic resources like solar energy, abundant wind power in the coastal belt of Sindh and Balochistan and the black gold of Thar coal field, and hydro power which are cheapest alternatives to the costly thermal power generated by fuel oil.

HIGHER TAXES & LOWER SUBSIDY TO MEET FISCAL DEFICIT

The fiscal reforms under IMF program emphasizing more on higher taxes and lower subsidies aimed at overcoming the fiscal deficit are feared to add to the burden on common citizens in general and private sector in particular.

Though the revenue flows are certainly important to economic recovery yet the affordability of the average income groups to the economic decisions is equally important to give a breathing space to the revenue generating quarters.

In view of the rising inflation, which aggravates the poverty level it is high time to contain inflationary pressures besides streamlining of the external inflows. The most important area which needs to be encouraged through good governance is development of domestic resources under a fast track development campaign to achieve economic recovery in the shortest possible time. In this respect, policies are required to bring on line the huge coal reserves, cheap wind power and hydro projects as import substitutes and cheap fuel alternatives are also needed to be developed as a fast track project.

In the present economic scenario external flows becoming more critical than ever in the current financial 2011 for economic recovery, domestic liquidity and foreign exchange reserves. However, the increasing dependence on external inflows and the IMF endorsement of the economic decisions are the key factors for financial and economic stability.

The private sector has expressed concerns that the financing of the fiscal deficit through potential taxation charges to increase revenue and withdrawal of power sector subsidy may add to the concerns of the common person and contribute aggravating the inflationary pressures already on the higher side.

Sources said that after a cyclical rebound in economic activity in financial year 2010 with a growth of 4.1 per cent the economic situation is once again at the point where the recovery momentum largely hinges on external & fiscal account and IMF's endorsement.

On the fiscal front, expansionary budget i.e. 4 per cent deficit for financial year 2011 should support the ailing economy, at least on face value. On monetary policy while the Central Bank (SBP) could only soften the current policy rate 12.5 percent if the persisting inflation brought to moderate. It may be recalled that government has announced budget outlay of PRs3.3trillion and an estimated fiscal deficit of 4 per cent for new financial year.