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ADB sees deficit narrowing down

January 18, 2003

ISLAMABAD, Jan 17: Pakistan’s fiscal position has improved significantly in the first quarter of 2002-03 as the overall fiscal deficit decreased by one per cent of the GDP compared to 1.7 per cent in the corresponding quarter of 2001-02, says the Asian Development Bank (ADB).

“While increase in tax revenues is on track, increase in expenditure is on the high side, and if the current trend in expenditure continues, it will be difficult to achieve the fiscal deficit target of 4.0 per cent for 2002-03,” the Bank warned.

The local ADB office here on Friday released its latest “Pakistan Economic Update” which also said that large increase in volume of textile exports in the first five months of 2002-03 augurs well for the performance of the textile industry.

“In addition, several factors are likely to boost demand for manufacturing and other sectors,” it further said.

“The State Bank of Pakistan (SBP) continued to maintain an easy monetary stance in the first five months of 2002-03 and the rate of interest on 6-months treasury bills declined to 4.3 per cent on Dec 11, 2002, compared with 6.3 per cent as of end- June 2002.

“Private sector credit seems to have picked up. The corporate debt market also remained active in the first quarter of 2002-03, and finances mobilised through term finance certificates and it almost doubled compared with the same quarter of 2001-02.

“Share prices maintained a rising trend through most of the period, as continued increase in remittances, appreciation of the rupee, low interest rates, and absence of investment opportunities in real sectors raised the demand for equities.

“The sharp improvement in balance of payments observed in the last three quarters of 2001-02 continued into the first quarter of 2002-03, with the current account remaining in surplus.”

Foreign exchange reserves held by the SBP, the ADB report said, increased from $4.3 billion as of end-June 2002 to $6.9 billion by Dec 14, 2002. “If reserves held by commercial banks are included, total reserves have risen to over $9 billion. The policy of paying off short- term foreign exchange liabilities, pursued in the preceding two years, was continued in the first quarter of 2002-03, and these liabilities declined further by $421 million to $2.7 billion.

“Recovery in exports and imports gained further momentum in the first five months of 2002-03, with exports increasing by 15.9 per cent and imports by 13.7 per cent. With greater access to the European Union markets and increased production by the textile industry, export target of 13.4 per cent for the full 2002-03 looks achievable.

“As the economy picks up, imports are likely to substantially exceed the growth target of 7.4 per cent, resulting in a somewhat larger trade deficit than the target of $1 billion set in the beginning of the year. However, because of larger amount of remittances, Pakistan should still end the year with a comfortable surplus in the current account of the balance of payments.

According to the ADB, the government had implemented a comprehensive agenda of macroeconomic stabilization, and economic and governance reforms during the last three years, the positive effects of which were now beginning to become apparent in terms of improvement in key macroeconomic indicators, including the fiscal deficit, the external account, and the external debt sustainability.

The first five months of 2002-03, the ADB said, witnessed positive trends in most commodity producing sectors, improvement in fiscal position, and robust increases in both exports and imports. Developments thus far indicate that the target of 4.5 per cent growth in GDP in FY2003 was likely to be attained, and possibly even surpassed.

“Outlook for 2002-03 has improved mainly because of expectation of better performance of the agriculture sector. Output of two out of three major summer crops has been higher than last year and the outlook for winter crop had also improved due to better availability of water.

“As a part of its on-going reform programme, the government has taken a number of initiatives in the first five months of the current financial year, particularly in the area of tax administration, legal and judicial system, and freedom of information. Implementation of tax administration reforms, which had been lagging behind, has picked up recently.

“The Central Board of Revenue (CBR) has taken some important steps, which include setting up of a Large Tax Payers Unit in Karachi, a Model Income Tax Unit in Lahore, Sales Tax Automated Refund Repository, preparation of Customs Administration Reform plan, and development of a new recruitment, training and promotion policy.

“These measures aim at improving services for taxpayers through reorganisation of the CBR on functional lines and automation of processing of tax return and applications for tax refunds, as well as improving the skill mix of the CBR staff through merit-based recruitment and training.

“The government has taken a number of very significant steps to implement police, legal and judicial reforms. Major recent reform initiatives include: (1) issuance of the Police Order in August 2002 by the President to construct and regulate police; (2) amendment of the Family Court Act in October 2002 to reduce delays in resolution of family disputes; (3) enactment of the law to establish Small Causes Courts in June 2002 to provide citizens access to speedy and cheap justice in minor cases; (4) changes in laws to empower session judges in each district to provide relief against unlawful imprisonment; and (5) designation of principal officers in all federal government departments for dealing with public reasonable cost, when requested.

“The government,” the Bank believes, “is committed to increase pro-poor budgetary expenditures, and the trend of robust increases in expenditure on education and health in the second half of 2001-02, continued in the first quarter of 2002-03.

“Expenditure on education was 25.8 per cent higher than in the corresponding quarter of 2001-02 and on health was 44.0 per cent higher. Expenditure on irrigation, another sector for pro-poor expenditure, increased sharply. Disbursement of micro credit through the Khushali Bank, Pakistan Poverty Alleviation Fund, and Agricultural Development Bank of Pakistan, taken together, also increased substantially in 2001-02 and the first quarter of 2002-03.

“Prospects of realising and possibly surpassing the government projected GDP growth rate of 4.5 per cent in 2002-03 are quite bright. This optimism is based on improved outlook for agriculture, manufacturing, and services sectors. Both supply factors (better availability of water for agriculture and better placed textile industry after heavy investment in the past two years) and demand factors (larger remittances, lifting of ban on serving meals at weddings, and financial institutions aggressively marketing consumer credit) are expected to boost domestic economic activity.