FISCAL DEFICIT Pakistan’s budgetary deficits, never very low, became the focus of great concern in the 1990s The reason for the growing worry was the government’s inability to finance them Earlier, large flows of foreign aid and remittances sent by Pakistanis working abroad had made it possible for the government to manage large deficits In the 1990s, both revenue sources declined precipitously, and the government had to resort to expensive borrowing to meet its obligations Poor credit ratings closed the cheaper options for the government; it had to turn to expensive sources of finance to meet its bills This resulted in a rapid buildup of both internal and external debt This situation was not sustainable The International Monetary Fund (IMF) made the reduction of the budgetary deficit its primary concern in the Standby Arrangements negotiated in October and December 1996, and in the IMF Extended Structural Adjustment Facility (ESAF) program that the government agreed to in October 1997 In the Standby Arrangement, the Fund endorsed a program of reform that would have had as its objective reduction of the fiscal deficit to 4 percent of the gross domestic product (GDP) by the end of June 1997 In the ESAF program, this target was revised to 5 percent, and the deadline for achieving it was extended to the end of June 1998

These changes were made at the insistence of the government of Prime Minister Nawaz Sharif, which felt that the lower target and the earlier date for achieving it were not politically feasible propositions Even the 4 percent target was contingent on the government’s ability successfully to undertake a program that included at least four features: extending the general sales tax (GST) to retail trade, collecting the tax on agricultural incomes that had been levied by the caretaker administration of Prime Minister Meraj Khalid, overall improvements in tax collection, and having people respond positively to the tax amnesty announced in March 1997 by Nawaz Sharif In March 1998, the IMF carried out a review of the country’s fiscal situation in preparation for the release of the second ESAF tranche Although it agreed to release the tranche, the Fund expressed considerable concern about the government’s fiscal performance An example of poor performance was the lukewarm response by the people to the tax-amnesty initiative India had introduced a similar scheme but had imposed a much higher tax on hidden incomes-30 percent compared to 75 percent by Pakistan Although the amount collected by Pakistan was negligible, India was able to mobilize Rs 100 billion, equivalent to 05 percent of its GDP Pakistan renegotiated the program with the IMF after assumption of political power by General Pervez Musharraf in October 1999 A commitment was made once again to bring down the fiscal deficit, but this time the government was able to meet the set targets

By 2004-2005, the last year of the program with the Fund, the deficit declined to 30 percent of GDP, slightly more than that in 2003-2004 (23 percent of GDP) but still well below the target specified by the IMF

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