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Pakistan’s budget deficit could expand due to election spending

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News Analysis |

The World Bank, on Wednesday, warned Pakistan that its budget deficit may increase due to weak tax revenues, expenditure escalation and increasing contingent liabilities in infrastructure projects. Against the parliament approved budget deficit of 1.479 billion rupees or 4.1% of GDP, the finance ministry has already booked a deficit of 826 million rupees or 2.3% of GDP in the first five months of the fiscal year.

This trend shows that Pakistan will be unable to meet its target budget deficit since it has already gone beyond half the limit in just five months. The tax collection has also been unable to meet the half year target. The Federal Bureau of Revenue (FBR)’s tax collection stood at 1.722 trillion rupees, still 89 billion rupees shy of the half-year target.

There was also a recovery in the agricultural sector due to the recent monsoon rains. Remittances from overseas Pakistanis has also increased by 2.5% in the first half of the fiscal year compared to the same period last year.

This also hints that FBR will be unable to complete its Rs. 4 trillion target by the end of the year. It happened despite the imposition of regulatory duties and the depreciation of the rupee that provides significant gain in the tax collected. The government has also awarded Rs. 54 billion to parliamentarians as development funds and they are likely to increase in the wake of the 2018 elections because parliamentarians would want to start new projects to help gain the favor of their voters.

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The budget deficit at the end of the last fiscal year was 5.8% and it was without paying any circular debts. The government is reluctant to pay these debts since they would increase the budget deficit. Inculcating the circular debt into the budget would increase the deficit by another 1.5% to 1.75% of the GDP. 

This trend shows that Pakistan will be unable to meet its target budget deficit since it has already gone beyond half the limit in just five months. The tax collection has also been unable to meet the half year target.

The World Bank has said that economic activity has expanded in the first half of the fiscal year due to robust domestic demand owing to the Pak-China Economic Corridor (CPEC). WB also said that public debt is sensitive to the materialization of contingent liabilities. These sectors come from Public Sector Enterprises who are making loss because of circular debts. These debts affect the power sector and ultimately lower the productivity of enterprises.

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The economic growth rates are expected to increase from 5.5% to 5.9% in the fiscal year 2017-18 but they would still fall short of the 6% expected growth rate in the budget. World Bank said that growth in the industrial sector was slow while there was a boost in the construction industry and services.

There was also a recovery in the agricultural sector due to the recent monsoon rains. Remittances from overseas Pakistanis has also increased by 2.5% in the first half of the fiscal year compared to the same period last year.


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