KARACHI – The country’s fiscal deficit may exceed seven percent of economic output, endangering its standing with international donors, due to a delay in implementing a reformed general sales tax (GST), analysts said on Monday.
The reformed GST, which is supposed to replace the current GST, was originally scheduled for implementation in July but has been delayed several times since then. Even its latest implementation date, January 1, seems unlikely now. The delays will squeeze revenue while Pakistan’s spending is surging to deal with the aftermath of floods that caused almost $10 billion worth in damage.
The revenue shortfall could push the budget deficit above seven percent of gross domestic product (GDP), analysts estimate, compared with the 4.7 percent target agreed with the International Monetary Fund for fiscal year 2010-11. “The rising fiscal deficit is squarely against one of the main covenants of the agreement with the IMF, which is likely to delay future tranches,” said Asad Iqbal, chief investment officer at Faysal Asset Management Ltd.
“If the IMF loses confidence in the government’s ability to manage this deficit, funding from other foreign institutions is also likely to dry up, resulting in severe consequences for the country.” In November 2008, Pakistan agreed to an $11 billion bailout programme with the IMF to avert a balance of payments crisis. It received the fifth tranche of the loan – $1.13 billion – in May 2010.
But the delay in the sixth IMF tranche, a lack of foreign aid and the cost of rebuilding after August’s floods has more than trebled government borrowing from the central bank, to a provisional Rs 324.64 billion ($3.785 billion) from July 1 to December 11, compared with Rs 106 billion in the same period last year.
To try and make up the shortfall, the government is considering a “Plan B”, according to media reports. This would end the current GST exemptions that have been given to sectors such as textile and fertiliser production. And while the government has not said there are alternatives being worked out – “There is no Plan B as far as I know,” said a senior government official.
The Federal Board of Revenue has the authority to remove exemptions without the approval of coalition partners to the government.
Reformed GST delay adds to strain on IMF deal
