High budget deficit needs fiscal consolidation; high inflation major challenge as food prices rising
Lower revenue generation and higher current expenditures are underlying reasons for the Pakistan’s stressed fiscal position. Without substantially increasing resource envelope, it would be difficult to sustain fiscal deficit at manageable levels, says UN ESCAP’s Economic and Social Survey of Asia and the Pacific 2011.
It suggests the government must carefully scrutinize and reprioritize spending to create room for public investment to support growth. The budget deficit, at 6.3% of GDP in 2010, will face further pressure in 2011 as a result of the devastation wreaked on the economy by the severe floods and the consequential need for rehabilitation and reconstruction activities.
“Pakistan has been experiencing double-digit inflation over the past three years. In 2010, inflation stood at 11.7%, having decelerated from 20.8% in 2009. Increases in electricity and natural gas charges and upward revisions in petroleum prices influenced production and transport costs, causing prices of other consumer price index items to rise, as well.” Inflationary pressures increased further due to the devastation caused by the floods. Further increases in electricity and natural gas charges and reforms in the generalized sales tax will automatically contribute to keeping inflation high, at least over the medium term, added the ESCAP survey.
On exports, the survey says though exports are reviving but imports grow more rapidly and the external current account deficit came down to 2.0% of GDP in 2010 from 5.7% of GDP in 2009. The improved performance in 2010 was helped by the relatively strong recovery of exports, which grew at 9.4% in 2010, while imports continued to contract, although at the much smaller rate of 0.3%. Overseas worker remittances grew by 14% and reached close to $9 billion in 2010, helping to reduce the current account deficit. With the overall balance of payments in surplus, foreign exchange reserves reached an all-time high of about $17 billion by the end of fiscal year 2010.
On growth, the survey says despite challenging security conditions and severe energy shortages, domestic economic activity rebounded to some extent in fiscal year 2010, with economic growth accelerating to 4.1% from 1.2% in 2009. Severe floods across the country from August to October 2010, however, added to the existing difficulties of the economy. More than 20 million people (or more than 10% of the population) were affected by the floods, which also severely damaged housing, businesses, agricultural crops and physical infrastructure. Private and public losses due to floods are estimated at $9.7 billion.
Indeed, the impact of the floods on the economy will continue to be felt in the coming years as damaged infrastructure will not only need to be repaired but also upgraded to meet the needs of a modern economy. Devastation caused by severe floods in Pakistan has dampened its immediate growth prospects and GDP growth is expected to fall to 2.8% in 2011.