Sunday, January 16, 2011

Budget deficit reaches record Rs 510 billion

Budget deficit reaches record Rs 510 billion

* Govt left with no option but to implement painful decisions from Feb 1
* All subsidies to be withdrawn

ISLAMABAD: The government has plans to implement some painful economic decisions from February 1 as budget deficit has grown to unprecedented Rs 510 billion and it has decided that subsidies on power tariff, oil prices and others will be withdrawn, official sources said on Saturday.

The political leadership has been informed of the country’s economic situation, which has no space to meet additional demands of subsidies on oil and other sectors, they said.

A five-member committee constituted by Prime Minister Yousaf Raza Gilani during economic review meeting on Friday, would hold meetings with the heads of all political parties to develop a consensus on economic decisions, the sources added.

They said the painful economic decisions have become necessary as the government has missed its initial upward revised target of containing the budget deficit at 2.6 percent of the GDP. The budget deficit for the first half (July-December) of the ongoing fiscal year 2010-11 has now been estimated at 3 percent of the GDP or around Rs 510 billion against the initial target of Rs 442 billion, they continued.

The sources said power tariff subsidies over and above parliament’s approved limit, withdrawal of increase in POL prices and additional security expenditures were the main causes that resulted in increase in budget deficit. The economic review meeting was informed that if subsidies were allowed during the second half of the fiscal, they would put unbearable burden on the economy and would leave no option but to increase borrowing from the market on higher interest rates.

They said the government would also try to develop consensus on the implementation of the performance benchmarks agreed with the International Monetary Fund (IMF), World Bank (WB) and Asian Development Bank (ADB), until June 2011.

A nine-month extension allowed by the IMF has provided Pakistan with time for completing the RGST, implementing a set of measures to correct the fiscal policy and amending the legislative framework for the financial sector.

They said implementation of a reformed GST involving a broader base, reduced exemptions, and input crediting, both at the federal and provincial level, parliamentary passage of the amendments to the State Bank Act and the Banking Companies’ Ordinance, agreement on measures to achieve the revised fiscal deficit target, including a realistic envelope for energy subsidies in 2010-11 based on a plan that is yet to be endorsed by the Asian Development Bank and the World Bank, and third-quarter fiscal performance that was consistent with achieving the full-year target were among the actions that would be critical for the completion of the fifth review. The government has plans to bring State Bank of Pakistan borrowing from existing Rs 180 billion to nil by June 30, 2011 and in this regards many proposals were under discussion at the Finance Ministry, the sources maintained

The IMF is expected to hold discussions with Pakistan for the fifth review soon and propose a set of performance criteria for end June and structural benchmarks that would form the basis for the sixth and final review under the Stand-By Arrangements.

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