growth
Baggage of the past
Bringing down fiscal deficit remains a huge challenge for the government
The economy is burdened by a huge fiscal deficit along with heavy debt besides double-digit inflation rates. A deficit budget is not a new phenomenon.
In the budget of 2010-11 history repeated itself as deficit of Rs.685 billion was recorded in the total budget outlay of Rs.3259 billion. Recently, budget deficit has increased the planned mid-year limit, of 2.23 percent of Gross Domestic Product (GDP), and reached at the level of 3.3 percent of GDP. The present government has been blamed of incompetence to generate enough revenues.
During the first two quarters of the current financial year total debt reached at nerve-breaking rate of Rs11,054.7 billion, which constitute 69.1 percent of the GDP. In the debt policy statement 2010-11, three major reasons have been identified for rapid debt hike during recent years, i.e., high interest payments, large subsidies and growing security spending needs.
Apart from heavy debt burden, debt-servicing is also making matters worse. There is a clear lack of effective policies of the government to generate revenue. It has been reported that almost 70 percent of the total national revenue is being consumed by debt-servicing, defense expenditures and in paying pensions while the rest of the 30 percent is spent on different development projects.
According to SBP reports, total services on external debt reached $2,211 million till December 2010 while total debt and liabilities servicing was 7.3 percent of the GDP.
Debt of reasonable size may not prove to be harmful in any developing country if it is meant to inject in the economy for development purposes. If the loan is invested judicially, it will yield positive result to the economy by raising productivity and widening economic activities.
Under the prevailing economic situation of the country, one cannot expect the GDP growth rate more then 2.8 percent at the end of current fiscal year. One of the main factors behind this slow growth rate of the economy is government’s inefficiency to overcome its fiscal deficit at a desired level.
Instead of taking steps to smoothen the ways for economic growth, Public Sector Development Programme (PSDP) has been further squeezed by Rs100 billion. Alongside, new projects have been shelved and only ongoing projects are to be continued and that too with reduced allocation. Thus, burden of repayment of heavy borrowing and its servicing will further affect development projects.
The adverse effects of heavy debt on our economy may be gauged by the fact, as revealed by Federal Bureau of Statistics, that Large Scale Manufacturing (LSM) has shown a negative growth of 2.3 percent in the first five months of the current fiscal year in comparison with the same period last year.
Heavy internal borrowing is one of the main factors which have been responsible for this negative LSM growth rate along with other factors, i.e. deteriorating law and order situation, ever-increasing incidence of terrorism and natural calamities.
Apart from slow-moving growth in LSM, the phenomenon of high inflation rate can also be noticed. Prevalence of high incidence of inflation rate of 14.61 percent on an average in the first two quarters of the current fiscal year is another factor hampering economic development of the country.
Heavy internal borrowing by the government from the State Bank of Pakistan (SBP) can be held responsible for inflation as recently government borrowing has been over Rs1.5 billion per day from internal resources according to SBP.
The prevailing high bank rate of 14 percent is another important factor along with a huge size of deficit financing for mounting inflation rate. These two factors are acting as leeches for the economy of Pakistan as private investors are crowded out. Alongside, foreign investors have lost their confidence and, therefore, are shy away from investing in the economy. As a consequence, marginalised groups have become more vulnerable.
Another very important macro-economic variable -- employment -- has been affected adversely due to recent pressure on the economy. In an economy where such a low proportion of revenues -- 30 percent -- is allocated for project financing, along with gradual lowering down in subsidies, can the employment situation be improved?
In view of the present economic situation, it is almost impossible to maintain the value of rupee. It will keep on depreciating, resulting in further strain on the economy in the wake of ever-increasing external debt.
Scientific measures should be adopted by the government to enhance the tax base so that revenue generation may increase. Emphasis should be laid on collection of direct taxes instead of indirect taxes. Moreover, the tax base should be broadened by bringing larger number of people in the tax net.
afshin@sdpi.org
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