Pakistan to Pare Budget Gap Even as Power Woe Hurts Growth

Pakistan’s new government pledged to narrow the widest budget deficit in more than two decades, as Finance Minister Ishaq Dar set a goal of reviving growth in an energy-starved economy he said was “shattered.”

The fiscal-deficit target for the year starting July 1 is 6.3 percent of gross domestic product, compared with a shortfall of 8.8 percent in 2012-2013, Dar said in his budget speech in Islamabad yesterday. He imposed additional levies, such as a sales-tax increase to 17 percent from 16 percent, to help fund higher spending on roads and dams.

“Painful fiscal adjustment will be needed for two or three years to put the economy back on track,” Dar said at a briefing in Islamabad today. “We plan to raise taxes through reforms and plugging leakages, not increasing rates across the board.”

The government plans to unveil an energy policy soon as Pakistan grapples with $5 billion of power-industry dues from unpaid bills that have choked electricity generation. The economy’s woes add to other challenges facing Prime Minister Nawaz Sharif, ranging from a plunge in foreign reserves that has boosted the odds of an International Monetary Fund bailout, to a Taliban insurgency in the northwest and growing insecurity.

“The deficit target is achievable if they keep subsidies and current expenditure under control,” said Raza Jafri, head of research at AKD Securities Ltd. in Karachi.

Tax Revenues

Tax revenues are projected to climb 22.3 percent to 2.59 trillion rupees ($26.3 billion) next fiscal year, according to budget documents. New tax measures will yield 202 billion rupees, Dar said today. Sharif will cut spending by the Prime Minister’s office by 45 percent. Government expenditure excluding defense, salaries and debt servicing will be cut by 30 percent.

Pakistan’s benchmark KSE100 index rose 2.3 percent to a record 22,833.20, at 12:47 p.m. local time. Pakistan State Oil, the biggest fuel retailer, rose 5 percent, the daily limit, to 330.42 rupees.

“The budget is good news for the entire corporate sector,” said Saad Khan, an investment analyst at Askari Investments Management Ltd. in Karachi that manages 11 billion rupees in stocks and bonds. “Foreign inflows will continue after this budget.”

Global funds bought a net $219.4 million of Pakistani shares in the 10 months ended April 30 compared with net sales of $63.5 million a year ago, according to the central bank.

Growth Target

Sharif is aiming for 4.4 percent economic growth next fiscal year, up from an estimated 3.6 percent this year. Dar said another objective is to keep inflation in single digits. Consumer prices rose 5.13 percent in May from a year earlier.

Dar, who has said he intends to curb tax evasion, imposed an additional 2 percent sales tax on all supplies made to unregistered companies, to help promote documentation.

The government set goals for 2016 of 7 percent GDP growth, a 4 percent budget shortfall and an increase in foreign reserves to $20 billion. Pakistan’s tax to GDP ratio is 8.9 percent.

The finance minister said June 11 that the government plans to end energy dues in 60 days to tackle a power crisis that is reducing GDP growth by 2 percentage points annually.

Pakistan’s rupee has declined about 4 percent against the dollar in the past year as concern that the economy may struggle weighs on the currency.

Foreign reserves slid 43 percent to $6.4 billion in June from a year earlier, enough to cover about two months of imports, central bank data shows.

Loan Program

The IMF won’t sign a new loan program without a “deep and clear” commitment from Pakistan on a set of policy reforms to curb the budget deficit, Jeffrey Franks, head of the IMF’s Pakistan mission, said in January. An IMF team will arrive in Pakistan on June 19 for a routine visit, Dar said today, without giving details.

Miftah Ismail, an energy adviser to Sharif, said June 5 the government in the short run “will have to write a cheque to pay off a big pile of debt that has choked” the energy industry. That may be done by selling rupee bonds to local banks, he said.

The $232 billion economy has expanded an average of about 3 percent since the start of 2008, less than half the annual pace of the previous five years, IMF data shows.

Sharif returned to power more than 13 years after his second period as premier was cut short by a 1999 army coup. Having won almost half of the seats contested in the May 11 general election, his Pakistan Muslim League-N party can govern without a major coalition partner.

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