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Macro – Fiscal account warrants attention

Combined budgetary balances of provinces depict a rather different picture than that portrayed by the federation in the budget FY11 (Jul-Jun).

The provinces are now projecting a combined deficit of PRs44bn for FY11 as against initial estimates of a surplus to the tune of PRs167bn.
This, ceteris paribus, could take FY11E consolidated deficit (federal + provincial) to PRs896bn (5.2% of GDP) compared to initial estimate of PRs685bn (4.0% of GDP).
Notably, with IMF ceiling at 4.0% of GDP on consolidated budget deficit, govt. would have to calibrate federal expenditure to remain within target.
However, if deficit shoots up to 5.2% coupled with shortfall in external flows, market could demand higher yields on govt. paper – risk of a policy rate hike.
Interestingly, latest news flow suggests that FY10A consolidated fiscal deficit has also exceeded target by 0.6% of GDP to 5.8% due to provincial deficits.
KASB Securities and Economics Research
8 July 2010

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