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Spin-doctors at work

June 17, 2012

THE spin-doctors in the ministry of finance have made indefatigable efforts to balance the expenditures with revenue receipts by distorting numbers and, at times, changing the formats of presentation.

In spite of this doctoring, an in-depth analysis reveals that the estimated expenditure level of Rs2960 billion is highly under-stated to match over-stated total receipts, jacked up by its two components namely, net revenue receipts and external receipts.

As regards the net revenue receipts, these are pitched at the level of Rs1774.9 billion as against the revised estimates of Rs1328.1 billion in FY 2011/12, showing a growth rate of 33.6 per cent. This rate of growth rate of growth projected for the next year will be unachievable in an economy which is afflicted with a synchronous down-turn.

The expectation of an enhanced level of external receipts at Rs386.9 billion, as against revised estimate of Rs226.2 billion, is as illusionary as the estimates of net revenue receipts. The expectations are placed on receipts of assistance under Kerry-Lugar Act, Tokyo pledges and privatisation proceeds. The estimates in the case of the former two sources as well as projected assistance under Non–Plan estimates, are not likely to be realised as the US has already cut off the assistance by 90 per cent of the Enhanced Partnership with Pakistan Act of 2009.

It is anybody’s guess that with these two major components of the receipts most likely to fall short, how far a lower estimate of net capital receipts at Rs477.8 billion in 2012/13 as against revised estimate of Rs525.5 billion in 2011/12 and bank borrowings at Rs483.8 billion as compared to revised estimate of Rs939.2, are credible?

In order to match over-stated receipts for net revenue receipts and foreign assistance as discussed earlier, expenditures are grossly under-stated by at least Rs243.3 billion by excluding expenditure on repayment of long-term loans of Rs216 billion and a reduction of Rs27.3 billion from gross development expenditure of Rs591.1 billion to Rs. 563.8 billion. This becomes obvious if the table titled “Budget at a glance” given in the budget 2012/13 is compared with the same table in the budget 2011/12.This apart, if the off-budget transactions are taken into account, an additional. expenditure of Rs391 billion will be incurred next year, as stated by the finance minister in his budget speech. Thus, there is already a yawning resource gap in the budget.

The off-balance budget transactions occur on account of issuance of sovereign guarantees by the government to the public sector enterprises. These fall into two categories. The first category relates to issuance of guarantees including those for rupee lending, bonds, rates of return, output purchase agreements and also covers losses of the public sector enterprises such as Pakistan Steel Mills, PIA, WAPDA, Railways etc.

The other category is that of those provided for commodity operations against the loans to PSE’s such as PASSCO, TCP etc and the provincial governments. Issuance of these guarantees has two implications. Firstly, they help in under-stating the public debt. If they are added, total public debt can go up. Secondly, they add to fiscal burden in a particular year in case of default or losses in transactions on account of below cost sale by them, made good through subsidies by the government.

The finance minister in his budget speech acknowledges the fiscal burden of these off-balance sheet transactions by stating that “the consolidated fiscal deficit is estimated at Rs1105 billion or 4.7 per cent  of the GDP as against 5.5 per cent of the GDP in financial year 2011/12, excluding debt consolidation of Rs391 billion, which is 1.9 per cent of the GDP.” It means that actual fiscal deficit is estimated at 7.4 per cent due to grant of subsidies of that order to PSE’s relating to energy and food items.

With no measures taken in the budget for reforming PSE’s operations, the so-called debt consolidation i.e. losses in transactions by the PSEs either in case of default or operational losses is likely to push the estimated fiscal deficit to much higher levels in 2012/2013.

In the context of the emerging scenario, nobody can deny that Pakistan faces a grave financial crisis and can barely afford running the state machinery during 2012/13 by bank and non-bank borrowings as done in previous years. In case it is done, the scourge of inflation and redistribution of income from the poor to the rich, which has already manifested itself in social and economic upheaval, will become uncontrollable. Since the budget is bereft of any sweeping reforms, perhaps imposition of financial emergency under Article 235 cannot be ruled out sooner or later.

The writer is a retired Joint Chief Economist of Planning Commission.