THE government has finalised a three-year Medium Term Macroeconomic Framework (2012-14) indicating continuation of stabilisation mode for a longer period and targeting growth rates of 4.2 next year, 4.5 in 2013 and 4.7  per cent in 2014.

This seems more realistic than last year’s projections, given nominal growth rate of 2.8 expected this fiscal year, down from original target of 4.5 per cent; The growth target was missed mainly because of unprecedented devastations caused by floods, higher international oil and other commodity prices, rising security expenditures, and as a result, slashed development spending.

The ministry of finance has also released a schedule for approvals for budget 2011-12, that along with MTMF, would be presented to the federal cabinet on May 4 for guidance and finalisation.

The budget strategy paper (BSP) has already been shared with the finance committees of the national assembly and the senate. The BSP would be presented to the cabinet on May 4, followed by its briefings to the president and the prime minister. The annual plan coordination committee (APCC) meeting has been convened on May 7, while the National Economic Council (NEC) meet on May 14. The federal budget would be presented to the cabinet on May 28 before its announcement in the parliament the same day.

According to Finance Minister Dr Abdul Hafeez Shaikh, maintaining economic stability would be the foremost challenge for the next budget in order to protect recovery, put the economy on a better growth path and pass on its benefits to more and more people and protect weaker segments of society The major economic issues identified by the government include containing fiscal deficit through revenue mobilisation and expenditure control, reducing inflation, overcoming energy shortages that is now affecting almost every section of the economy, increasing investments and creating jobs. For this, the government plans to introduce RGST and tax on agricultural income.

While the government could not make progress on these proposals during current year, it has also miserably failed to collect anything from capital gain tax on stock trading introduced in the last budget.

Law and order, defence and security would remain the focus of funding next year. This would be followed in this order by water, power, social safety net, food/agriculture,  macroeconomic management, human development, transportation and communication, commerce/industry, housing and pensions.

Estimating current year rate of inflation at 15.5, the macroeconomic framework aims to bring it down to 12 per cent next year and then scale it down to 9.5 in 2012-13 and eight per cent in 2013-14 – an objective the government has been pronouncing for years but was not able to achieve.

The higher fiscal deficit continues to be a real challenge mainly because of stagnant revenues.

“The biggest challenge to economic stability remains the fiscal deficit”, concedes the government and plans to reduce it to five per cent of GDP next year from 5.5 expected this year against a budget estimate of four per cent. The deficit is projected to come down to 4.5 in 2012-13 and then four per cent in 2013-14.

But the fiscal deficit targets do not include grants, which have remained unpredictable in the last two years because of higher security expenditures.

Notable is the fact that government had announced last year to expand tax-to-GDP ratio to 9.8 during the current fiscal year which it now expects at 9.1 per cent. For the next year again, the government is targeting a tax-to-GDP ratio of 9.7 – lower than current year target – moving slightly higher at 10 per cent in 2012-13 and 10.3 in 2013-14.

The tax revenue has been projected at Rs1952 billion next year, going up to Rs2315 billion in 2012-13 and Rs2713 billion in 2013-14. How these revenue targets would perform going forward could be gauged from the fact that tax target for the current year has been reduced to Rs1588 billion from budgeted Rs1667 billion – down by Rs79 billion.

The government had projected national savings for the current year at 13.7 of GDP but it has dropped to 11.3 per cent. For the next year, the national savings are targeted at 14.9 of GDP, 15.5 in the year after and 16.2 per cent in 2013-14. Likewise, the investment-to-GDP ratio had been originally estimated at 17.1 for the current year but now it has been revised down to 11.6 per cent. Next year, this ratio has been projected to rise to 16.6, moving higher to 17.6 in 2012-13 and 18.5 per cent in 2013-14.

The total consumption that stood at 88.6 of GDP in 2008-09 has now increased to94.6 per cent this year. The government would try to contain it at 90.4 of GDP next year and 88.6 per cent in 2013-14 – a level it stood in 2008-09.

The total public debt targeted at 58.1 of GDP during this year is now forecast at 57.7 per cent, perhaps because of a suspension of IMF programme and resultant partial blockage of inflows by other lenders.

The government expects to reduce public debt to 55 per cent of GDP next year, gradually containing at 49.8 in 2013-14. A positive contribution has been made by the current account owing to higher than expected remittances and better exports supported by higher international prices.

The government had set a current account deficit limit of 6.6 for the current year, which has dropped to a just 0.7 per cent of GDP. It is now anticipated to rise to 3.7 of GDP next year, increasing to 4.7 a year later and then 5.3 per cent in 2013-14.

This increase in current deficit is mainly because of rising imports that would result in a gradual draw down on official foreign exchange reserves.

For example, the exports at $24 billion this year are to go up to $25.9 billion next year, $27.7 billion in 2013 and $29.4 billion in 2014.

In comparison, imports at $35 billion this year are projected to jump to $39 billion next year, $42 billion in 2013 and $44.5 billion in 2014.

The government expects that at the end of current year, the forex reserves will peak at $19.6 billion, going down to $17.7 billion next year, further down to $14.7 billion in 2013 and then drastically reducing to $9.9 billion in 2014.

The negative side here is that foreign exchange reserves providing coverage to 4.9 months of imports would drop to four next year, followed by three months in 2013 and going down to 1.8 months in 2014.