Thursday, September 03, 2009
KARACHI - The fiscal and budget deficit target set by Ministry of Finance for the year 2009-10 could face some slippages and fail to materialize if the government is proved unsuccessful to tackle the issues of tax administration and electricity subsidies, an analyst showed this concern on Wednesday. Muzzammil Aslam, Head of Research at JS Global, said that IMF would strictly follow the deadlines of performance criteria set in its latest review especially related to taxation and electricity tariffs with an aim to re-balance budgetary deficit. He further said the government has also committed to fulfil the new structural conditionalities within a certain time framework given by IMF however, any difference in real and estimated cost of budget deficit is unlikely to strain IMF program, as Finance Ministry has already taken the performance waiver from IMF in the second review. He also mentioned that the related program commitments have been converted into structural benchmarks for the third review. IMF has further asked Pakistani authorities to introduce a broad-based VAT to correct the structural shortcomings in Pakistan s tax system, which relies on a very narrow tax base. The introduction of a broad-based VAT in mid-2010 is a key pillar of their fiscal strategy.
The fiscal deficit target was missed by 90bps for FY09 if compared to IMF projection, the analyst added.
It is important to mention that the government has estimated budget and fiscal deficits to be stayed at 4.6 per cent and 7.6 per cent of GDP respectively for the current financial year.
It must be recalled that the government has amended by a Presidential Ordinance of the NEPRA Act to ensure monthly determination by NEPRA of the fuel adjustment surcharge in line with international fuel prices, quarterly determination of overall electricity tariffs by NEPRA and notification of the adjusted tariffs within 15 days. Later, by September 15 government s has to take approval for making regulations to form new occupational groups within the FBR and revision of the structure of Regional Tax payer offices and submission of the VAT law to Parliament by end of 2009.Both conditionalities have macroeconomic relevance as in the absence of a de-politicized mechanism for regular electricity tariff adjustments, sizable financial imbalances in the electricity sector are likely to resurface. The adoption of a broad-based VAT is the cornerstone of the revenue effort over the medium term, and a crucial component of the authorities strategy to finance the needed increase in public investment without recourse to external borrowing or crowding out domestic private investment. imilarly, the government has reached a revised agreement with World Bank and ADB staff on a schedule for tariff increases that postpones the elimination of tariff differential subsidies to 2010/11. The budget deficit for the fiscal year 2008/09 (July-June) was 5.2 per cent of gross domestic product (GDP), higher than the government target. The deficit for fiscal year 2008/09 was targeted at 4.3 percent of GDP and was 3.0 percent for the first nine months ending March 31. According to the FY09 fiscal accounts that were released by the Ministry of Finance (MoF), MoF reported a deficit of 2.2 per cent of GDP in the 4QFY09 alone. The extra-ordinary deficit for the last quarter was led by aggressive development spending of Rs 210 billion, as a result of which, the total expenditure came in at Rs455bn in FY09.
Overall, the financing mix of the deficit was tilted in the favour of domestic (internal) financing, led by Rs 251 billion investment in NSS scheme and Rs 260 billion investments by banks. In revenue, last year will be remembered as the most volatile year in the recent past, as oil prices remained volatile; making an all time high of $147/bbl in July 2008 and a low of $32 in February 2009. While the former has impacted the expenditure side led by huge subsidies and the latter affected the overall FBR tax collection ability. Overall, tax revenue target was missed by fair margin and came in at Rs1.2 trillion (up 14.6 per cent) or 9.2 per cent of GDP. Direct tax collection growth remained dismal and came in at 13 per cent compared to sales tax and excise duty. Both were up 17.3 per cent and 38 per cent respectively. The performance of non-tax revenue sector remained robust and depicted a growth of 44 per cent led by SBP profits and defence income. While the current expenditure rose by 9 per cent and development expenditure remained at Rs 455 billion, lower than the target of 550 billion. The fundamental reason for the containment of current expenditure was the pass down of fuel price subsidy and partly electricity subsidy. However, interest payment has slightly inched up to 637 billion or 4.9 per cent of GDP. The budget deficit for the full-year came in at Rs 680 billion or 5.2 per cent of GDP. Similar to FY08, the bulk of the financing was done through domestic sources. Though the external gross receipts remained higher but the higher re-payment of external debt kept the share of external sources subdued. The majority of the domestic funding came through investments in saving schemes and bank investment in Treasury bill.
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