May 31 (Bloomberg) -- Pakistani Prime Minister Yousuf Raza Gilani may raise government salaries and cut taxes in an election-year budget that risks widening the deficit to a record.
The steps may increase the shortfall to an unprecedented level in the year ending June 30, 2013, according to Standard Chartered Plc, that predicts a budget gap of more than 8 percent of gross domestic product from between 7 percent and 8 percent in the previous 12 months. United Bank Ltd. and Optimus Capital Management Pvt. also forecast a record deficit.
A Pakistan general election due by February is adding pressure on Gilani to counter growing public anger over persistent power blackouts, the fastest inflation rate in Asia and an insurgency on the Afghan border. Spending more to appease voters risks further straining government finances, which have relied on domestic borrowings after aid flows from the U.S. and the International Monetary Fund dwindled.
“Financing the deficit remains the single biggest challenge for policy makers,” said Sayem Ali, a Karachi-based economist at Standard Chartered. “Indications are that the government will need another bailout package from the IMF sometime this year.”
The economy expanded 3.7 percent in the current fiscal year to June, the government estimates. Foreign direct investment fell 50 percent in April to an eight-year low. Finance Minister Abdul Hafeez Shaikh is scheduled to present the budget tomorrow.
“Government borrowing has to fall for inflation to slow,” Shaikh said at a news conference in Islamabad today. “For this, we need to collect more taxes and reduce our expenditure.”
Pakistan collected 1.45 trillion rupees ($15.5 billion) in the 10 months ended April 30 and collection will be 25 percent higher than last year by end-June, he said. The government cut current spending by 10 percent, he said.
With street protests and factory shutdowns rising, Gilani said this week the budget will have no new taxes, and that it will outline steps to create 100,000 more jobs, and increase cash handouts for the country’s poor.
Pakistan recorded its highest budget deficit of 8.8 percent of GDP in the year ended June 1991, according to government data.
‘Flirt with Danger’
“If the government flirts with danger and is unable to generate new income, the deficit will swell to a record level,” said Khalid Iqbal Siddiqui, head of research at United Bank Ltd. in Karachi, who estimates the shortfall will reach 8 percent in the current fiscal year to June.
The country already has one of the world’s lowest tax-to-GDP ratios, estimated at 8.6 percent in June last year, according to Macro-economic Insights in Islamabad. The figure is between 13 percent and 18 percent in developing economies, according to Invest Capital Markets, a brokerage in Karachi.
Financing a bigger budget deficit by “printing money” may jeopardize the government’s plan to bring inflation to less than 10 percent in the next fiscal year, said Asif Ali Qureshi, executive director at Optimus Capital Management Pvt. in Karachi.
“You can’t expect any radical move from this government in its last budget,” said Qureshi. “The focus will be to buy voters through some populist measures.”
The Pakistan rupee has slipped more than 7 percent against the dollar in the past year. The benchmark Karachi Stock Exchange 100 Index has advanced 15 percent in the same period.
Inflation accelerated to an eight-month high of 11.27 percent in April, limiting room to cut interest rates to support the $200 billion economy. The pace of price gains is the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.
Energy shortages are compounding the challenge, and may slice 4 percentage points off economic growth in the current fiscal year, the government estimates.
”Our factories are facing severe problems, and it’s reflected in the export numbers,” said Anwar Tata, CEO of Tata Group in Karachi, and former chairman of the All Pakistan Textile Mills Association.
The country’s trade gap widened 72 percent to $1.52 billion in April as exports fell, according to the Pakistan Bureau of Statistics. Textiles account for about two-thirds of overseas sales, which have also been hurt by slowing demand.
With a view to wooing voters ahead of the election, the government on May 24 said it would increase spending on roads, electricity, education and healthcare by 19.5 percent to 873 billion rupees in the 12 months starting July 1.
As aid dried up, the government borrowed 442 billion rupees from the central bank in the first 11 months of the fiscal year, defeating its zero-borrowing target. That was double the amount borrowed last year, State Bank of Pakistan data shows.
Borrowings may still rise. An $11.3 billion IMF loan to Pakistan expired in September, with disbursements suspended in May 2010 after the country failed to meet conditions attached to it. The Washington-based lender, which has described the country’s economy as “highly vulnerable,” said in February the government should widen the tax base, curb some subsidies and curtail central bank financing of the budget deficit.
Pakistan is also trying to mend a fractious relationship with its main aid provider, the U.S., which scaled back funds over differences on how to stop militant groups from operating in the country’s tribal areas and a refusal to re-open supply routes for NATO troops in Afghanistan. The Senate Appropriations Committee has requested $1 billion in aid for Pakistan for fiscal year 2013, down from about $1.5 billion.
Gilani faces a political test, as well. Pakistan’s Supreme Court on April 26 ruled him guilty of contempt for not obeying its earlier order to reopen corruption cases in Switzerland against President Asif Ali Zardari, his party colleague.
Gilani’s administration, seeking to strengthen its position before the poll, may increase salaries of civil servants by 20 percent, according to Ali of Standard Chartered Bank.
The government may also reduce taxes on fertilizers and pesticides, Qureshi said, adding that that federal excise duty on cement may also be cut to 500 rupees a ton from 750 rupees.
To contact the reporter on this story: Haris Anwar in Islamabad at Hanwar2@bloomberg.net.
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