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State Bank recommends reduction in government size

30th April, 2010

The State Bank of Pakistan (SBP) has recommended that the size of the government should be condensed in light of  severe revenue shortfall, heightened military spending and the accumulation of external and domestic debts which could lead to a fiscal deficit in the range of 5% to 5.5% for the current financial year.
The second SBP quarterly report released on Monday, 29th April, 2010 stated that in recent meetings with the International Monetary Fund, the need for a reduction in the Public Sector Development Programme and relaxation of the fiscal deficit target had been recognised. The report said the fiscal deficit was projected to be in the realm of 5% to 5.5% of GDP.
The SBP estimates a GDP growth of 2.5% to 3.5%. It identified current expenditure as a particular challenge exacerbated by mounting domestic and external debts and continued military spending for combating terrorism.
Spending has also been enhanced by efforts to address the circular debt crisis plaguing the energy sector, as well as a “less desirable policy to ensure higher-than-market price for farmers”. The report further stated that growth prospects for agriculture remained weak compared to the robust growth witnessed last year.
Although development spending increased by 69.6% during the first half of the financial year, it was below the levels indicated in the original budgeted amount.
The report stated that bold fiscal reforms were the solution to achieving and maintaining macroeconomic stability in the medium term. According to the report, the reforms “need to focus on the entire range of options, from increasing efficiency of public expenditures and reducing the size of government to raising the tax-to-GDP ratio.”

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