ISLAMABAD: The Finance Ministry's report presented before the Parliament reveals that the lose fiscal-discipline has worsened the economic situation of Pakistan and it is the first step towards an unsustainable debt that can lead to macroeconomic crisis. The government's decision not to pass on POL and electricity subsidy, importing wheat, subsidy to textile and expenditures related to ongoing war against terrorism pushed current expenditure to Rs1,858 billion around Rs480 billion more than the targeted amount, the report states.
The fiscal year 2007-08 showed that a loose fiscal policy is the first step towards an unsustainable debt path that can lead to a macroeconomic crisis. The fiscal discipline shown between 2001-02 and 2006-07 has been reversed because of the difficulties faced last year. The sustainability of fiscal policy is a built-in feature of the Fiscal Responsibility and Debt Limitation Act 2005. Some aspects of the Act were violated during 2007-08 for instance the 2.5 percentage point reduction in debt to GDP ratio every year could not be achieved. On the contrary, the debt to GDP ratio increased by 1.1 percent of GDP. Also, the elimination of revenue deficit by end June 2008 was missed as the revenue balance eroded substantially. Fiscal year 2007-08 has been a difficult year for Pak economy.
Political tensions and adverse security developments owing to the intensification of the war against terror, surge in oil, food and other commodity prices, global economic meltdown on the external front had serious consequences for fiscal discipline. Absence of an effective policy response during the political transition to a new government further accentuated the difficulties on the fiscal front and damaged to the economy as a whole. "The hard earned macroeconomic stability underpinned by fiscal discipline just evaporated in thin air, for which Pakistan is expected to pay a heavy price in terms of slower economic growth and investment with associated rise in unemployment and poverty; higher current account deficit and the attendant rise in the country's debt burden; a loss of foreign exchange reserves and the concomitant pressure on exchange rate; and most importantly, higher inflation and the associated rise in interest rates," the report reads.
Massive slippages (Rs269.3 billion) took place on account of not passing the rising international cost of fuel and food to domestic consumers. Oil subsidy was budgeted at Rs15 billion and the international price of oil was hovering around $50-55 per barrel (Arab Gulf Mean) at the time of preparing the Budget 2007-08.The 150 per cent surge in oil prices at breakneck pace took place at a time when the country was passing through political transition to a new government. Long delays in passing the higher international price of oil to domestic consumers led to the rise in oil subsidy to Rs166 billion, that is, Rs151 billion more than the budgeted amount.
Similarly, the higher cost of furnace oil, used in power generation, was not allowed to pass to domestic consumer by raising electricity tariff. Therefore, against the budgeted subsidy of Rs53 billion, the power subsidy increased to Rs114 billion - a slippage of Rs61 billion. At the time of preparing Federal Budget 2007-08 the government never thought of importing wheat due to a bumper wheat crop of 23.3 million tonnes in 2006-07.Hoarding, smuggling and mismanagement of wheat operation forced the government to import 1.7 million tonnes of wheat at all time high prices sell it at a much cheaper price against a Rs40 billion subsidy.
Similarly, the government had to make payment to textile sector under R&D, amounting to Rs17.5 billion. Such amount was not earmarked for the textile sector in the Budget 2007-08.Owing to the intensification of the war against terror the government had to spend Rs49 billion more than the budgeted amount. As a result of these developments, the current expenditure surged to Rs1,858 billion - Rs480 billion more than the targeted amount. The development expenditure was cut to Rs73 billion by postponing various projects as well as by rationalizing expenditure. While there was a slippage on tax revenue side to the extent of Rs45 billion, it was over compensated by mobilizing Rs68 billion additional non-tax revenue.