ISLAMABAD: The government has prepared a revised economic plan envisaging a drastic 50 per cent cut in the development programme, scaling down revenue target by more than five per cent and two weekly holidays for the entire public sector to narrow down a daunting fiscal deficit to a level acceptable to international lending agencies and political parties.

The government’s economic team feels confident that these measures were enough to bring back on track the 11.3 billion standby programme with International Monetary Fund derailed since May last year.

The step will also help the government restrict the fiscal deficit to five per cent, background discussions with senior finance ministry officials suggest.

In a recent meeting with the World Bank, Finance Secretary Dr Waqar Masood Khan is reported to have tried to allay concerns that the government was sidestepping benchmarks agreed to with lending agencies on macroeconomic front, resulting in holding back of foreign inflows by aid agencies.

He is reported to have told the World Bank that the government had engaged in a meaningful dialogue with political parties to have a broader ownership of the budgetary restructuring.

An IMF mission in this background is expected to visit Islamabad in the last week of current month to restart negotiations on future outlook to review progress achieved through the political dialogue.

Informed sources said the government had revised the revenue target to Rs1575 billion for the current year, against an original estimate of Rs1667 billion because it did not expect sizable return from a couple of tax measures including reformed general sales tax that may not come into force this year and is likely to be delayed till July 1, 2011. The PSDP is also being envisaged to be restricted between Rs100-120 billion.

The two weekly holidays are being proposed as part of austerity measures that also envisage mandatory limits on non-salary current expenditures. These measures would be provided to PPP-PML-N parliamentary committee for consideration.

The renewed hopes of budgetary controls are based on financial results of first six months of the current year. The federal government has restricted releases for development programme to a paltry Rs69 billion or just 24.6 per cent of the total PSDP.

In normal circumstances, an amount of Rs140 billion should have been utilised in the first six months, accounting for 50 per cent of the Rs280 billion original PSDP.

As a result, the overall federal expenditure has been restricted at about 40 per cent of annual allocations. This has helped the federal government to reduce its State Bank of Pakistan borrowing to Rs119 billion from Rs400 billion a few months ago.

This included adjustment of $635 million foreign inflows from the United States and central bank’s profit to the federal government.

Likewise, the overall expenditures of the provincial governments have been limited at 35 per cent of total budgets envisaged for the first half of the fiscal year.

Informed sources said the provincial governments had almost blocked releases for the development schemes during the second quarter (September –December 2010) of the fiscal year in the aftermath of floods.

As a consequence, the provincial governments have together been able to provide a cash balance of Rs69 billion. The Punjab government that has been breaching its overdraft limits for more than 21 months has moved into cash surplus, obviously helped by the State Bank’s decision to set aside for the time being repayments of the principal overdraft. As a result, the Punjab government is servicing only its interest payments.

In the process, however, a number of social sector initiatives and routine public services have badly suffered. For example, the Punjab government has blocked funds to hospitals and educational institutions for maintenance and provision of medicines and equipment and delaying payments against civil servants’ TA & DA (travelling and daily allowances) for five to six months.

A disagreement, however, still persists between the ministry of finance and the planning commission over the exact size of the Public Sector Development Programme (PSDP) for the current year.

The finance ministry wants to trim down the federal development programme from budgetary allocation of Rs280 billion to about Rs120 billion – a reduction of about 57 per cent and had already moved a summary to the prime minister for approval.

The planning and development division, however, insists on utilisation of Rs170 billion for the development programme with the help of a foreign exchange component of about Rs16 billion, allowing the federal government releases of Rs140 billion and Rs10 billion for Earthquake Reconstruction and Rehabilitation Authority.

The prime minister, informed sources said, did not approve the finance ministry’s summary for cuts in development programme until he had a presentation by secretaries of finance and planning.

RED AREAS

The concerns, however, remain over rising petroleum prices in international market and about Rs229 billion demands from three loss making entities that could push up the fiscal deficit.

The cabinet committee on restructuring was told at a recent meeting that Pakistan Railways, Pakistan International Airlines and power companies called for liquidity injection of Rs27 billion, Rs37 billion and Rs165 billion, respectively.

The government has although rejected these demands for want of more prudent financial restructuring, these two head together pose serious threat to the revised budgetary projections because of huge circular debt and subsidy requirements.