Pakistan hurtling toward new financial crisis
By Damon Wake, AFP
May 31, 2012, 10:51 am TWN
ISLAMABAD -- Minuscule tax revenues, mismanagement and overgenerous subsidies mean Pakistan is heading for a new financial crisis, say diplomats and analysts, with this week's budget unlikely to offer any respite.
The budget deficit stood at 6.6 percent of GDP last year, according to the central bank, the State Bank of Pakistan (SBP), which warned that government borrowing was crowding out the private sector from access to credit.
That reduces the prospects for economic growth in a country that is on the front line of the war against al-Qaida and where more than 5,000 people have been killed in bomb and gun attacks by Islamist insurgents since 2007.
External forecasts for the current fiscal year see the budget deficit rising to about seven percent of GDP, while economists warn the government is running out of ways to fund it — and reluctant to embrace reform with polls looming.
Some see little alternative to a major financial crisis or a return to the IMF, which bailed out Pakistan with an US$11.3 billion loan package in 2008 that stopped last November after Islamabad rejected strict reform demands.
"I think it's possible they could have a real financial crisis by the middle of this year or the fall. I don't think it's a question of if, but when they go back to the IMF," one Western diplomat said.
Pakistan's tax revenues are among the lowest in the world at just 9.8 percent of GDP in fiscal 2010-2011, says the Asian Development Bank, and less than two percent of the population pays tax on their income.
On top of this, the government shells out huge sums on electricity subsidies — about 1.5 percent of GDP in 2010-11, according to the IMF — for a sector so blighted by mismanagement that most of the country suffers crippling power cuts.
Pakistan has also missed out on payments from the United States for its efforts to fight militancy under the Coalition Support Fund (CSF).