KARACHI: The State Bank of Pakistan has warned that the fiscal deficit of 8.5 per cent last year (FY-12) is not sustainable and could push the country towards a debt trap as the public debt-to-GDP ratio has reached 62.6 per cent.

The annual report for FY-12 released by the bank here on Wednesday rejected the government’s expectations for higher economic growth and low fiscal deficit for the current fiscal year, FY-13.

It said the real Gross Domestic Product grew by 3.7 per cent in FY-12, less than the target of 4.2 per cent.

“The target GDP growth of 4.3 per cent for FY-13 appears optimistic; we think Pakistan will grow at about the same rate as it did last year, 3.7 per cent.”

The report sees the fiscal deficit for FY-13 much higher than the target set by the government. “While the government hopes to achieve a fiscal deficit target of 4.7 per cent of GDP, we think a range of 6-7 per cent is more realistic.”

Although the increase in fiscal spending contributed to commercial activity, it did so at the cost of pushing Pakistan’s budget deficit to 8.5 per cent of GDP.

“The size of the fiscal deficit is not sustainable as it is contributing to inflation; squeezing out private investment; impacting the balance sheet of commercial banks; and could push the country into a debt trap.”

The report said the transfer payments were another heavy item on the fiscal side. With income support programmes like the Watan Card and Benazir Income Support Programme, direct outreach was deemed necessary to alleviate the suffering from the floods in FY-11.

“Another fiscal drain is the weak financial position of public sector enterprises (PSEs). Direct support to Pakistan Railways, Pakistan Steel Mills, PIA and others PSEs, amounted to Rs33.8 billion in FY-12,” the report said.

The economy underperformed but this outcome was expected given the energy shortages; security concerns; and floods in two consecutive years, the report said, adding that the growth was more broad-based compared to FY-11, as it was evenly distributed across agriculture, industry and the services sector.

The SBP cautioned over higher consumption during FY-12. “It is important to realise that over-dependence on consumption makes growth unsustainable, especially when the country’s investment rate has been falling.” During FY-12, the investment-to-GDP ratio reached a low of 12.5 per cent, due to security concerns; energy constraint; excess capacity with the manufacturing sector; the fiscal spillover on the balance sheet of commercial banks and concerns about sector-specific policies.

The report said the subsidies turned out to be more than three times the target, but this included Rs391 billion that was spent to consolidate the PSEs’ debt, especially in the power sector. “Excluding subsidies, the fiscal deficit narrows to 6 per cent of GDP.”

This reflects higher-than-target expenditures, including debt-servicing.

“The fiscal devolution has not been as smooth as anticipated.”

The report said the country’s domestic debt increased by Rs1.6 trillion (year-on-year growth of 27 per cent) during the year, and the public debt-to-GDP reached 62.6 per cent.

The shift of this debt towards the shorter-end has not only increased the debt-servicing burden on the country, but has also intensified the rollover and interest rate risks.

These debt dynamics, together with persistence in primary and revenue deficits, indicate that Pakistan could move into a debt trap, said the report.

“On a final note, we would stress the urgent need to embark on structural reforms in the energy sector, PSEs and public finances,” it said.