InfoAnda - Q+A-Are Pakistan's revised economic targets realistic?

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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Weekend Edition Singapore Asia Pacific World Q+A-Are Pakistan's revised economic targets realistic? Reuters - Wednesday, November 17 Send IM Story Print By Sahar Ahmed KARACHI, Nov 16 - The Pakistani government announced revised economic targets at an international conference on Monday, hoping to reassure donors and secure more aid to rebuild from floods that caused almost $10 billion in damages. WHAT ARE THE REVISED TARGETS? Pakistan announced a fiscal deficit target of 4.7 percent of GDP, or 812 billion rupees , agreed to with the International Monetary Fund for fiscal year 2010/11 as part of an $11 billion bailout programme dating from 2008. Inflation is forecast at 15 percent, and the economy is expected to grow 2.5 percent for the fiscal year ending June 30. Prior to the floods, the fiscal deficit was targeted at 4 percent of GDP, inflation at 9.5 percent and GDP growth at 4.5 percent. HOW REALISTIC ARE THE TARGETS? Not very, for the most part. Analysts said the deficit target of 4.7 percent is likely unachievable because government spending was steadily rising even before the floods, while revenue was flat. Post-flood, spending will be even more. Analysts are forecasting a fiscal deficit around at least 6 percent of GDP. The State Bank of Pakistan expects the 2010/11 deficit to be between 5.1 percent and 5.6 percent. Tax collection is also likely to miss its target, despite promises to implement new taxes and bring more of the economy into the tax net. The delay in implementing a reformed general sales tax has already put Pakistan behind its revenue target. In the first quarter ending Sept. 30, the fiscal deficit stood at 1.6 percent of GDP, according to the International Monetary Fund, which itself warned that Pakistan would likely overshoot the deficit target by the end of the fiscal year in June. The inflation target is doable, but volatile food prices and excessive government borrowing of 184 billion rupees ($2.15 billion) from the central bank could both lead to an inflation spike. The GDP growth target of 2.5 percent is achievable, according to analysts. WHAT CAN THE GOVERNMENT DO? The government could cut its development spending, but that may prove to be a bigger challenge for them politically as it would drastically affect economic growth and problems of the poor would remain unresolved. There would be no new investment, such as construction of roads, bridges or dams, which would be a brake on the economy. Beyond that, the government is trying to raise taxes. Pakistan told its donors of additional tax measures totalling about 60 billion rupees on Monday. The main one is the reformed general sales tax . The government introduced a bill in the National Assembly last week proposing the RGST, a key condition for securing the sixth tranche of an $11 billion IMF loan that has kept the country's economy afloat. The main opposition party, the Pakistan Muslim League-N , and the government's main ally, the Muttahida Qaumi Movement , have said they would oppose the bill. Pakistan Muslim League-Q and the Awami National Party have also said they are against the implementation of RGST. The government also said it would eliminate its electricity subsidies - another unpopular measure with Pakistanis, who are already facing high levels of inflation. The government raised its electricity tariffs by around 2 percent on Nov 1. WHAT IF PAKISTAN MISSES THE TARGETS? Pakistan's current standby programme with the IMF is due to end this year. If Pakistan decides to go into another IMF programme, missing the fiscal deficit target may have a negative impact in securing another loan agreement from the IMF. A rising fiscal deficit is a big threat to the country's macroeconomic stability, because it fuels inflation. In a country like Pakistan, that, too, would retard growth. It could eventually affect the country's balance of payments and its ability to pay back its external debt, which would have a negative affect on its sovereign ratings. 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