Tag Archive: NFC Award


In a previous post on our sister 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.

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Are the provincial chief ministers in Pakistan, who have presented deficit budgets, aware of the fact that PIGS model will be order of the day for subsequent cash injection from the IMF after October 2010? It means an end to the life of luxury at the cost of taxpayers and total austere lifestyle. But it seems that they are oblivious of this dangerous reality and will continue to draw doomsday closer to our doorsteps. 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.

In an article published in The News, a member of Musharraf’s economic team has painted doomsday scenario for the present economy. According to him, (a) Shaukat Tarin has drowned the country in debt; (b) Pakistan will face serious economic crunch if VAT or modified GST is not implemented from October 1, 2010; and (c) presenting a deficit budget by provincial governments in the midst of massive resource transfer to them is nothing but the height of financial indiscipline. According to the article, seeking over $11 billion assistance from the IMF against the advice of senior government officials was a great mistake. He should have realized that these amounts would have to be returned to the IMF in the next 3 to 4 years.

Referring to officially documented figures, the article states that: “In the last decade, Pakistan’s economy witnessed a major economic transformation. The country’s real GDP increased from $60 billion in 2000-01 to $170 billion in 2007-08, with per capita income rising from under $500 to over $1000. During the same period, the volume of international trade increased from about $20 billion to nearly $60 billion. For most of this period, real GDP grew at more than 7 per cent a year with relative price stability. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government’s social policies contributed to a reduction in poverty and an improvement in many social indicators.”

Value Added Tax (VAT) has become a highly misunderstood tax. The general perception created by its opponents is that it is highly inflationary, will increase the tax burden on poor consumers; and business would be adversely affected. Lack of effective communication with the stakeholders and general public has led to the building up of these misperceptions. The detractors have received political support as all the major political parties have taken a firm stand to oppose VAT. The political parties do not want to lose their vote bank of business and traders’ community. But if Pakistan does not implement VAT or modified GST on October 1, 2010, it will face serious economic consequences.

The IMF will not release its next tranche; the World Bank and ADB would stop lending and Pakistan may not receive money from the Kerry-Lugar Act. We have two options: either we continue to play politics with VAT and allow Pakistan to become a bankrupt state by December 2010; or we implement VAT and take the economy out of the current crisis in the next 2-3 years.

Third, by presenting the first provincial budgets after the new NFC Award, the provinces have shown how fiscally irresponsible they could be. 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 sowed 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 will begin its new fiscal year (2010-11) 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?

Provincial governments are totally oblivious to the dangerous developments taking place on Pakistan’s financial scene. The chief ministers must note that Pakistan will be negotiating a new IMF program in October/November 2010. This program will be in line with the PIGS (Portugal, Iceland, Greece, and Spain) model in which austerity measures will be the key conditionality. Restructuring of PSEs including laying off thousands of non-productive workers, elimination of power subsidies and many expenditure reduction measures will be the necessary part of the new program.