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Major reforms on the cards to control fiscal deficit

Major reforms on the cards to control fiscal deficitISLAMABAD: With fiscal deficit going out of hand and threatening the country’s macroeconomic framework, the government will introduce in a couple of days some of the major reforms, including withdrawal of sales tax exemptions, to build on a nine-month breather allowed by the International Monetary Fund (IMF) on its standby programme.

And the fresh resolve has in its background the panic that political gains achieved through the 18th Amendment and the new National Finance Commission (NFC) Award could collapse in the absence of additional tax measures.

A senior government official said on Wednesday that these measures were inevitable to show seriousness to the international community and lending agencies that at least a first step had been taken to fix serious macroeconomic imbalances.

When asked if the reform programme had been delayed for a few months, he replied in the negative. “It is current. That is why the IMF’s standby programme has been revived for nine months after having been suspended in May 2010.” The official said that the fiscal deficit had already crossed its half yearly target by a wide margin and a lot of time had been wasted to fix that. The half yearly fiscal deficit should have been about 2.23 per cent, but estimates suggest it has already gone beyond 3.3 per cent.

He said the political leadership had been informed about the dire consequences of the increasing macroeconomic imbalances and had been requested for immediate steps to correct it and to take lending agencies on board. He did not rule out the visit of an IMF team next month to re-start deliberations for half-yearly budgetary restructuring.

Asked if the government now planned to implement Plan-B envisaging withdrawal of sales tax exemptions and zero rating through notifications and cabinet decisions, he said there was always a Plan-B and would be known to all at an appropriate time.

Another official said President Zardari had been misled by some of his friends that Pakistan had reasonable foreign exchange reserves and could do without RGST or IMF inflows. As a result, he had cancelled a scheduled meeting with an IMF delegation last month.

“That impression has now been rectified,” he said, adding the leadership had been informed that it was not just the foreign currency inflows that were necessary for the economy to run smoothly, but an IMF programme was crucial to take all international development partners along.

The official said that unless budgetary restructuring was made afresh, the fiscal deficit could be even higher than 7.5 per cent of GDP, accounting for about Rs1,285 billion at the end of the year against a budgetary target of about Rs685 billion.

This was reinforced by Dr Ehtisham Ahmed, the ministry of finance’s adviser and a central figure in advising the government on introduction of RGST. He told a gathering of local and foreign economists that the 18th Amendment and the National Finance Commission Award would collapse if the government failed to introduce RGST, as agreed to with the International Monetary Fund (IMF).

“This is disastrous,” said Dr Ehtisham, while referring to an estimate that the fiscal deficit could cross Rs1200 billion during the current fiscal year. He said the 18th Amendment and NFC award had transferred a lot of resources to provinces on paper. The provinces had started expenditures on anticipation of increased share, but in reality the revenue collection without RGST was not going to increase and hence their share would remain less than expectations and create further fiscal gap.

FISCAL DEFICIT: He said the initial transactional cost of fiscal devolution was always high.

Dr Hafeez A. Pasha, a former finance minister, said his conservative estimates suggested at least three per cent higher fiscal deficit that targeted by the government. The government has a fiscal deficit target of 4.7 per cent for the current year.

He said the problem lay with the government’s failure to mobilise revenues, take forward the reform agenda and an extravagance showed by the government in increasing salaries by 50 per cent when the country was passing through difficult economic conditions and the impact of floods.

With the fiscal devolution introduced through the 18th Amendment and the NFC award, he said, some structural difficulties had arisen.

In his view, the federal government has to give 56 paisa out of every rupee of tax collection, which has eroded its willingness to impose more taxes because the political cost of doing this was too high. Also, because the provinces got higher share out of federal resources, they lacked incentive to raise more revenue.

He said the original revenue collection target for the current year was estimated at Rs1,552 billion, but the government raised it to Rs1,667 billion, which was a challenging task to begin with.

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