AS expected, the government is taking the easiest course to narrow the rising fiscal gap. Apparently, there is consensus on three things to manage risks These include around Rs80 billion cut in the development programme, over Rs40 billion high cost syndicated debt for payment to oil companies and about Rs45 billion additional fund raising through National Savings Scheme at home and abroad.

The finance ministry estimates that fiscal deficit, based on half-yearly projections, could be around Rs170 billion higher than the annual budgetary target of Rs399 billion. That would mean a much higher deficit of around six per cent of GDP instead of targeted four per cent.

The government has opted to keep the oil and electricity prices unchanged until the general elections on February 18 by which time it would be clearer how to go about. By that time, there may be latest estimates of economic growth—may be closer to six per cent--- on cumulative effect of quasi-fiscal debt and reduction in development programme. So far, the finance ministry has been saying any rate between 6.5 -- 8 per cent will be a good number.

There is no dispute that about 15 per cent cut in the public sector development programme will carry a substantial socio-economic cost. The Rs520 billion PSDP for improving the living standards would be curtailed. So far, the federal and provincial governments have been able to utilise about Rs230 billion( in the first half of the current fiscal year).

The second quarter utilisation of development funds is usually higher than the first quarter because of pick up in the implementation activities after initial the start- up problems. This is not the case this year. The implementation has further slowed down in the recent weeks because of elections and overall security environment resulting in evacuation of foreign engineers from the project sites. Even after the elections are over, the new government would take some time settling down and that would affect the pace of work. Some major cuts in allocations for the Higher Education Commission and the Khushal Pakistan Programme are therefore imminent.

In these circumstances, the overall development spending may remain more or less at the last year’s level or at best touch Rs450 billion. This year’s PSDP was about 25 per cent higher than last year’s Rs415 billion.

The Rs38 billion syndicated loan being borrowed from the banking consortium for payment to oil companies at about 9.9 per cent interest would increase government’s debt burden. It has come at a time when fiscal deficits are mounting.

These two loans were arranged in two installments despite reservations expressed by the central bank over interest rates. This included a Rs18 billion loan through a consortium led by the Habib Bank about two months ago, followed by negotiations for another Rs20 billion from consortium led by the National Bank which is being finalised. This would mean the next government will have to pay an extra amount of Rs14 billion in interests out of public money.

Likewise, the interest rates on the National Saving Schemes may need to be increased to attract Rs45 billion additional resources. Of that, the government expects it can fetch about Rs30 billion or so by realising hitherto untouched potential available with the overseas Pakistanis by offering them instruments in foreign exchange. Independent economists understand that even fund raising through National Savings Scheme or investment bonds would increase the government’s debt servicing cost and affect the banking industry.

The economic managers have been pleading before the president and the caretaker prime minister that subsidies have been causing a great haemorrhage to the national economy and it was getting difficult to contain fiscal and current accounts deficits in the backdrop of recent depletion in foreign exchange reserves by $1 billion. Their hope about raising funds through NSS is based on recent improvements in inflow of remittances despite a slow down in other sources of foreign inflows (net foreign investment is down by $1billion during July-December 2007) ) in the heat of political uncertainty and imposition of emergency, lifted later.

A long drawn impact of subsidies, President Musharraf’s political difficulties and security situation may lead to deterioration in Pakistan’s credit rating in the international foreign markets where it has over $2.7 billion of sovereign bonds. Such developments coupled with energy shortages are taking a toll on industrial production, posing serious threat to economic growth and revenue collection, already falling short of the target.

The government, it seems so, is in a catch-22 situation given the fact that any increase in interest rates or energy charges could lead to further push in headline inflation running higher at over eight per cent against targeted 6.5 per cent, fuelled by double digit food inflation.

The deficits have increased owing to government’s inability to timely rationalise energy prices--- both oil and power – because of political compulsions, general uncertainty after the judicial crisis and to some extent in the aftermath of December 27 assassination of Benazir Bhutto. The economic cost of these developments on future generation may remain unquantifiable but would, no doubt, be far reaching.

While opposing the rationalisation of energy prices, a majority of the cabinet members had taken the position that in the heat of mounting pressures arising out of flour, gas and electricity shortages across the country, an increase in oil prices and electricity tariff could be suicidal. There can be no two opinions about the inflationary impact of such a move but the longer-term risks could be even higher for the national economy.