Keeping in mind the prevailing economic difficulties the economic mangers seemed to have made some major miscalculations in the federal budget 2011-2012.
The fiscal targets set by the Federal government, in particular the fiscal deficit of four per cent (Rs851 billion) and economic growth rate of 4.5 per cent of Gross Domestic Products (GDP) are seen by many analysts as ambitious. This analysis is based on macroeconomic indicators which have traditionally been marked by fiscal indiscipline. In the new federal budget proposal the government has envisioned the country’s economy to grow at 4.5 per cent, whereas the ever-widening fiscal deficit has been estimated at four per cent. The declared modus operandi to achieve the fiscal deficit-related target, the analysts say, would inevitably reflect adversely on the government’s efforts to help the ailing flood-hit economy to grow at a pace of 4.5 percent.
While foreign financing in a country struggling to keep terrorists at bay is expected to remain dismal, the cash-strapped government, as it did in the outgoing FY11, would look to rely heavily on (some say by 84 per cent) on domestic sources for meeting the gap of Rs851 billion for fiscal deficit in FY12. These domestic sources are none other than the central and commercial banks whose budgetary credit to the fund-starved government, according to State Bank figures, totaled at Rs622.128 billion during July-May 28, FY11, which was almost double the amount of funds given in the corresponding period last year. A renewed spate of government bank borrowings in FY12, the analysts fear, would lead to a complete crowding out of the private sector that would reflect negatively on the economic growth of the country. According to SBP data, the risk-averse banks lending to the private sector are witnessing a declining trend as the first 11 months of FY11 saw the credit to private sector standing at Rs102.47 billion; Rs1029 million less than the amount lent during the same perioud in FY10.
“Absolutely, the achievement of 4.5 per cent GDP growth target would be at risk as growth comes from the private sector and not the public sector,” said Asfar Bin Shahid, an analyst. The analyst believes that present credit availability for private sector is hitting the lowest level in the country as banks are investing more and more in the risk-free and heavily-weighted government papers. “The private sector is finding no money to invest. The darkest aspect is that the government is spending this money on the State Owned Enterprises (SOEs) which have shown deterioration in their productivity, marketing and structure over the years,” Shahid noted with concern. He said the SOEs were overloaded and breathing hard under additional labor force employed on the basis of their political affiliations. “The banks’ funding (to SOEs) is gradually converting into loss… you cannot recover it,” the analyst said and added that: “4.5 per cent GDP growth would be difficult to achieve.”
There are, however, indications that the government is trying to lessen the volume of banks lending to the deteriorating SOEs or Public Sector Enterprises that contracted phenomenally to Rs18.243 billion during July-May FY11 from last year’s Rs68.942 billion.
This, however, is not the case when it comes to government borrowings from the commercial banks that during this period remained exorbitant amounting up to Rs489.560 billion against Rs204.758 billion of the corresponding period last year. This amount is in addition to the government’s “inflationary” borrowing of Rs132.568 billion from the state bank during the said months.
Throughout FY11 these mammoth budgetary borrowings by the government kept the private sector, which generates economic activity and is therefore considered to be the real source of growth, at bay.
“The increased borrowings of government to meet its budget deficit led to the crowding out of the private sector,” Sindh Finance Minister Murad Ali Shah conceded while unveiling the provincial budget for FY12 at Sindh assembly last Friday. He went on to reveal that the private sector investments, as a proportion of economy in Pakistan, were at their lowest in the last 4 decades. “There is hardly any job creation in private sector to absorb our ever-increasing population of youth,” he added. “With higher reliance on domestic sources, the government will either cause inflation (through SBP borrowing) or would create a crowding out effect through commercial bank borrowing,” said Nauman Khan of Topline Securities. This means that besides crowding out of the private economy, the government’s heavy budgetary reliance on the banking system would also thwart Islamabad’s latest calculations for inflation which is already a staggering 15 percent. The analyst said: “Either way the government would advocate the central bank to keep the interest rate levels elevated.” About the economic growth target, Khan said the “buoying” fiscal deficit would more certainly force the cash-strapped government to curtail its developmental spending that would in turn reduce “impute for economic growth in the country.” Last year too, the country was unable to meet its four per cent economic growth target by 1.5 percent owing to, what Federal Finance Minister Hafeez Sheikh said was, the economic danger the country was facing since 2008. he made the statement while talking to media after the launch of the economic survey 2010-11 in Islamabad, If all goes well with foreign financing and management of natural disasters any shortcoming in the achievement of fiscal targets would be caused by none other than the government itself.
