25 July, 2014 / Ramazan 26, 1435

hafeez-shaikh-afp-670
Finance Minister Abdul Hafeez Shaikh. — Photo by AFP

ISLAMABAD: Minuscule tax revenues, mismanagement and overgenerous subsidies mean Pakistan is heading for a new financial crisis, say diplomats and analysts, with this week's budget unlikely to offer any respite.

The budget deficit stood at 6.6 per cent of GDP last year, according to the central bank, the State Bank of Pakistan (SBP), which warned that government borrowing was crowding out the private sector from access to credit.

That reduces the prospects for economic growth in a country that is on the front line of the war against al Qaeda and where more than 5,000 people have been killed in bomb and gun attacks by insurgents since 2007.

External forecasts for the current fiscal year see the budget deficit rising to about seven per cent of GDP, while economists warn the government is running out of ways to fund it — and reluctant to embrace reform with polls looming.

Some see little alternative to a major financial crisis or a return to the IMF, which bailed out Pakistan with an $11.3 billion loan package in 2008 that stopped last November after Islamabad rejected strict reform demands.

“I think it's possible they could have a real financial crisis by the middle of this year or the fall. I don't think it's a question of if, but when they go back to the IMF,” one Western diplomat said.

Pakistan's tax revenues are among the lowest in the world at just 9.8 per cent of GDP in fiscal 2010-2011, says the Asian Development Bank, and less than two per cent of the population pays tax on their income.

On top of this, the government shells out huge sums on electricity subsidies — about 1.5 per cent of GDP in 2010-11, according to the IMF — for a sector so blighted by mismanagement that most of the country suffers crippling power cuts.

Pakistan has also missed out on payments from the United States for its efforts to fight militancy under the Coalition Support Fund (CSF).

This brought around $8.8 billion into Pakistan's coffers between 2002 and 2011, including $1.5 billion in 2009-10, but Islamabad stopped claiming the money as ties with Washington collapsed in the wake of the raid that killed Osama bin Laden last year.

“There's not really any money coming in, and that being the case, the government is financing itself by borrowing from the local banks and the local banks aren't seeing deposits coming in to keep up,” said Liz Martins, an economist with HSBC.

The pressure on finance houses “means they have very limited money to lend to the private sector,” she said.

“There's no money coming from the IMF, no money coming from the bond markets, and international investors are very cautious.”

Islamabad borrowed 365 billion rupees ($4 billion) from the banking system — both private banks and the SBP — in the first half of the current financial year, the central bank said in its second quarter economic report.

With inflation already running at around 11 per cent, the alternative of printing money to pay debts opens the way to the nightmare of hyperinflation.

The IMF says Pakistan needs to raise tax revenues substantially to reduce the deficit sustainably, but with an election due within months analysts do not expect Finance Minister Abdul Hafeez Shaikh to follow its advice in his budget on Friday.

“I don't think the government is able to bear the terms that come with going back to the IMF,” said Sartaj Aziz, former finance minister and vice chancellor of Beaconhouse National University.

The situation was already serious, he warned. “The total expansion of currency is higher than ever, so it is already reaching dangerous levels. It has to be arrested by drastic remedial measures,” he said.

Officials from the finance ministry were repeatedly contacted by AFP, but declined to comment on how they planned to finance the deficit.

In Pakistan, once a general election is called, an interim government takes power for three months while campaigning is under way and Aziz said he thought this would give the government a way to duck difficult budget decisions.

“I think the government will be happy to wait until the election is called and hand the problem over to the caretaker government,” he said.

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Comments (29) (Closed)


abdul Sheikh
Jun 08, 2012 02:53pm
out of context.
Ali Raza
May 31, 2012 10:52am
Bro! which economy are you talking about? just looking at banks, can not solve public deficit issues. I think Greece example is before us. They did same thing and finally has come up with huge fiscal deficit. By putting burden on next government is not a right decision. Strong Banking sector is also not a "very good" sign for any country. Look at financial crisis 2012 in US and other countries and specially Ireland whose three major Banks' balance sheet is twice to Ireland' s GDP. Only need of the hour is political will and ability of politicians to tackle this problem and I believe current government lacks in both areas.
abdul Sheikh
Jun 08, 2012 02:57pm
how about your capability? why are you looking somebody else for your salvage? believe in yourself.
andygeezer
May 30, 2012 10:34am
Wont be long then before Pakistan has the begging bowl out to the IMF or other western countries, well its time to cut all aid to this country.
raika45
May 30, 2012 12:22pm
What caretaker government will want to get embroiled in this financial fiasco? All this while the super rich have been defying the government in not meeting their tax obligations and yet no one in power had the guts to take them on.You have millions in overdue electricity payments.Money that could in most part solve your power shortage if it was used to pay your power producers.Same story, poor enforcement.You borrow money only if it can in the future result in financial returns to pay your debts.You do not borrow money to spend on dubious popularist programs.A ruling party must keep in mind the well being of the nation.Not it's own survival at the expense of the nation's future.Pakistan you are really in trouble now.The past is nothing to what awaits you.It is time sensible and financial experts come up with a plan.Of course if you do and are successful , the ruling party will claim it as their work.
Mustafa Razavi
May 30, 2012 03:29pm
The reform has a name, Imran Khan.
Cyrus Howell
May 30, 2012 03:42pm
"Pakistan ‘heading for new financial crisis without reforms." That is certain, and more inflation will crush the poorer citizens, and possibly cause them to act. + "Find out just what the people will submit to and you have found out the exact amount of injustice and wrong which will be imposed upon them; and these will continue until they are resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they oppress." -- Frederic Douglass, civil rights activist, Aug. 4, 1857
Cyrus Howell
May 30, 2012 03:59pm
LAST year’s floods in Mirpurkhas, Badin, Umerkot and Sangher left behind a trail of miseries. There was non-stop rainfall for more than one-and-a-half months. The transport system, agriculture production, land fertility, infrastructure, sanitation and water supply system were badly affected. It almost ruined the lives of 98 per cent of the rural and 85 per cent of the urban population. After witnessing such an enormous loss, 95 per cent people migrated to safer areas for survival. Unfortunately, measures are yet to be taken to mitigate the difficulties and to plan the coming rainy season which is about to set in. (DAWN) So how will the government be able to squeeze flood damage into this new budget and satisfy principal and interest payments on it's debts? Will that payment be in Euros, US Dollars or British pounds?
@IAgnikul
May 30, 2012 05:33pm
Is the poor guy a magic talisman now?
Ajilala
May 30, 2012 05:53pm
Absolutely Sir,or else complete disaster.
BRR
May 30, 2012 06:57pm
You mean the "Financial and Banking Defaults" that is coming, is IK?
Aftab
May 30, 2012 07:50pm
Imran Khan is the ONLY one who can stop Pakistan from destroying itself. Current politicians have shown what they are capable of.
nandkishor
May 30, 2012 07:58pm
pakistan should improve its world image about terrorist sheltering first, second remove anti indian & anti hindu mentality, investments & tourists will flooded if pakistan will start beleiving india as friend not enemy.. dawoods & memons & ladens which r sheltered in pakistan are real enemies of pakistan economy..
jd shami
May 30, 2012 11:24pm
This PPPP government will destroy Pakistan's economy just like BHUTTO did during early seventies by nationalizing industries, schools.
Love Pakistan
May 31, 2012 01:51am
until and unless all major parties unite on an agenda to take tough decisions and leave the so called Defence Council, Pakistan's poor lot will have to eat grass in real terms. The tragedy is those who plead sovereignty seldom come under any difficult situation. These Mullahs and generals are taking us to a black hole. Sorry and sorry for this beautiful country which is being ruined by these ignorants. All parties including army is part and parcel of sad demise of motherland.
Mustafa Razavi
May 31, 2012 03:36am
Ha ha ha ha. Glad to see so many negative ratings for my previous comment. The status quo deep state thought police is on the prowl. Looks like these folks are having nightmares about the tsunami.
Mustafa Razavi
May 31, 2012 05:23am
Still amused, the status quo stalwarts are so much on the edge about the tsunami, a mere mention of Imran Khan's name can trigger a frantic deluge of negative responses.
Mustafa Razavi
May 31, 2012 05:29am
@Cyrus Howell Looks like Mr. Fredric Douglass could have made his point with a lot fewer words if English had a word for "Ghairat".
Farooq Khan
May 31, 2012 05:38am
IMF, World Bank, West, and USA - they all one - we only to get rid off them
man
May 31, 2012 06:22am
pak spend 45% of the budget on military. no dollar is coming through investment and pak NR are not investing in pak.......
Maaz S
May 31, 2012 06:45am
Mustafa Razavi, i understand your feelings and appreciate them but we need to focus on objectivity rather than any personality. we spend (% of GDP as on 2009-10) 12.5% on defense 22% on Interest (federal + provincial) 7.5% on Subsidies 17.5 on development expenditure 40.5% federal and provincial expenditure we have created the atomic bomb while our population ate grass (Nadeem F paracha`s article on Grasss eaters of Bakistan). Its high time to invest in educating people, healthcare facilities and building up the industrial infrastructrure. we no more need to feel insecure about our existance or threat from any neighbouring country (GOD forbid, if there would be a nuclear war it would result in devastating effect on millions of people on both sides)
Maaz S
May 31, 2012 06:46am
1) Bring down defence expenditure to minimal (probably till 5-8%) over the period of time 2) AS pointed out in the article only 9% tax to GDP ratio, it would have to be increased to 15-18% subsequently proper mechanism of TAX collection would bring efficiency in the current revenue The annual revenue in 2009-10 was Rs 2.078 Trillion while the total expenditure for the same period was Rs 3.007 Trillion” Difference of Rs 929 billion in just 1 year????????? whom should the government beg ? local banks?? SBP?? IMF??? Other countries??? How do you expect to improve situation with this crazy expenditure level??? We are some of those countries who live beyond their means. Certainly good for marketeers but NOT for economist because they loose out on savings (an important determinant for investment)
rohit
May 31, 2012 06:58am
A handful of politician can not do anything if public get aware of their rights...... A revolution is needed from the people of Pakistan to teach the lesson and punish the corrupted politicians....
Sam
May 31, 2012 10:05am
Banking sector of Pakistan is still very very strong. Moreover there is too much remittances sent to Pakistan from overseas Pakistanis. We should remain optimistic because banks like HBL,UBL,MCB and Bank AlHabib are very strong and stable.Unlike western banking sectors HBL,UBL,MCB etc. are very stable and are in business since last 60 years.Employment in these banks are very very secure and Foreign AID,remittances are significantly boosting Pakistani economy.
Sam
May 31, 2012 10:18am
Get rid of them and remain isolated.We cannot manufacture a pin how can we get rid of them.
Ali Raza
May 31, 2012 10:57am
Agreed. As I said earlier while replying to a comment, no magical fiscal or monetary policy is required. I mean just look what we are doing with money and what should we do with it. But above all, political will and ability is required.
H Husain
Jun 03, 2012 03:19am
1-Get rid of PPP 2- Get rid of most of the corrupt politicians and start from a clean slate
Pavas
Jun 04, 2012 02:26pm
Seriously!!!! Does Pakistan really spend 12.5 % on defense?? I used to think it to be around 2.5-3% of GDP..Can you please provide any source for your claim??
Sajjad
Jun 03, 2012 08:18am
Politicians are not the only scourge and evilness. REMEMBER , A COUNTRY IS FORMED FROM ITS PEOPLE AT GRASS ROOTS LEVEL, THAT IS RIGHT!!!! OUR AWAM NEED CLEANSING . WHY?? -who does mixing/malawat? -who does not pay taxes? -who has a pathetic narrow minded approach to everything? -who puts up illegal connections? -who are violent prone and male egocentric? -who stops others from progressing? -who is expert at backbiting/lying/decieving? -who charges 'rishwat'? -YOU SEE WHAT I AM GETTING AT , IT IS THE AWAM!! WHO NEEDS PROPER CLEANSING.