ISLAMABAD, Oct 12: The budget deficit is likely to be in the range of 4.1 per cent to 4.3 per cent of the GDP during the fiscal year 2005-06 as against 3.8 per cent announced in the budget following the fallout of the Saturday’s earthquake on the economy.
An analytical report of ABN Amro, released here on Wednesday, said that the budget deficit would be wider than their earlier forecast of 4 per cent of the GDP.
It has to be stressed, however, that it is still too early for a definitive assessment of the final outcome on this score.
The report also forecast that the CBR would be unable to maintain the impressive momentum of tax collection it has managed so far in the first quarter of this year, and full year tax revenues will fall short of the budgeted target by around 1.3 per cent.
According to the report, the earthquake will have direct fallout on the government’s budgetary position. As the enormous scale of rebuilding effort required, it becomes clear the initial Rs5 billion allocated for relief/reconstruction will need to be upped substantially.
However, private philanthropy — which, by all accounts, is being geared up in an unprecedented manner — coupled with international aid will mitigate the full impact. While it is too early to assess the final toll on the government’s fiscal position.
Should the deficit be wider, the report says the government’s first impulse is likely be to monetize the same. Hence, we may witness direct recourse to State Bank of Pakistan (SBP) rather than to the financial markets.
SBP’s impulse, as central bank in such a crisis situation, would be to suspend any monetary tightening bias it may have had. “Hence, our guess is that if banks bid at T-bill auctions with inflation in mind, and where real yields “should” be, they may meet with disappointment”.
In the aftermath of the earthquake, prices of food and construction material are also likely to be pressured upward. The loss of food grain stocks and livestock in the affected region, and the rush to donate basic necessities witnessed in other parts of the country, means that the recent downward course of food prices may be reversed for the next few months.
In addition, prior to the earthquake, the onset of winter in the northern areas and Afghanistan was expected to ease prices of construction materials. This was expected to bring the House Rent Index (HRI) — a key driver of CPI inflation during FY05 — lower. Now, construction activity may not witness as big a slowdown as rebuilding efforts continue through winter (in areas where the weather will permit the same).
While the report forecast the CPI inflation to fall in a range of 9-10 per cent for fiscal year 2005-06. With the epicentre of the losses in the northern areas, the impact on the wider economy will not be large.
