Bloomberg News

Pakistan Seeks to Pare Budget Gap Even as Power Woe Hurts Growth

June 12, 2013

Pakistan’s new government pledged to narrow the widest budget deficit in more than two decades, as Finance Minister Ishaq Dar set a goal of reviving growth in an economy he said was “shattered” and hampered by energy shortages.

The fiscal-deficit target for the year starting July 1 is 6.3 percent of gross domestic product, compared with a shortfall of 8.8 percent in 2012-2013, Dar said in his budget speech in Islamabad yesterday. He imposed additional levies, such as a sales-tax increase to 17 percent from 16 percent, to help fund higher spending on roads and dams.

“Curbing the fiscal deficit is a key aim of the budget strategy,” Dar said in parliament. “Pakistan will borrow less from the central bank, introduce new savings plans and end untargeted subsidies.”

He said the government will unveil an energy policy soon as Pakistan grapples with $5 billion of power-industry dues from unpaid bills that have choked electricity generation. The economy’s woes add to other challenges facing Prime Minister Nawaz Sharif, ranging from a plunge in foreign reserves that has boosted the odds of an International Monetary Fund bailout, to a Taliban insurgency in the northwest and growing insecurity.

“The deficit target is achievable if they keep subsidies and current expenditure under control,” said Raza Jafri, head of research at AKD Securities Ltd. in Karachi. “They do realize the puzzles and I think it’s possible.”

Tax Revenues

Tax revenues are projected to climb 22.3 percent to 2.59 trillion rupees next fiscal year, according to budget documents. Sharif will cut spending by the Prime Minister’s office by 45 percent. Government expenditure excluding defense, salaries and debt servicing will be cut by 30 percent.

Sharif is aiming for 4.4 percent economic growth next fiscal year, up from an estimated 3.6 percent this year. Dar said another objective is to keep inflation in single digits. Consumer prices rose 5.13 percent in May from a year earlier.

Dar, who has said he intends to curb tax evasion, imposed an additional 2 percent sales tax on all supplies made to unregistered companies, to help promote documentation.

The government set goals for 2016 of 7 percent GDP growth, a 4 percent budget shortfall and an increase in foreign reserves to $20 billion. Pakistan’s tax to GDP ratio is 8.9 percent, according to the government.

The finance minister said June 11 that the government plans to end energy dues in 60 days to tackle a power crisis that is reducing GDP growth by 2 percentage points annually.

Rupee Decline

Pakistan’s rupee has declined about 4.3 percent against the dollar in the past year as concern that the economy may struggle weighs on the currency.

Foreign reserves slid 43 percent to $6.4 billion in June from a year earlier, enough to cover about two months of imports, central bank data shows.

The IMF won’t sign a new loan program without a “deep and clear” commitment from Pakistan on a set of policy reforms to curb the budget deficit, Jeffrey Franks, head of the IMF’s Pakistan mission, said in January.

Miftah Ismail, an energy adviser to Sharif, said June 5 the government in the short run “will have to write a cheque to pay off a big pile of debt that has choked” the energy industry. That may be done by selling rupee bonds to local banks, he said.

The $232 billion economy has expanded an average of about 3 percent since the start of 2008, less than half the annual pace of the previous five years, IMF data shows.

Sharif returned to power more than 13 years after his second period as premier was cut short by a 1999 army coup. Having won almost half of the seats contested in the May 11 general election, his Pakistan Muslim League-N party can govern without a major coalition partner.

To contact the reporters on this story: Haris Anwar in Islamabad at hanwar2@bloomberg.net; Augustine Anthony in Islamabad at aanthony9@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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