Government allocates Rs 147 billion for energy sector subsidy

LAHORE: The government has allocated Rs 147 billion for energy sector subsidy for 2011-12 as against the subsidy of Rs 343 billion in FY11, down 57 percent. Based on the prevalent oil prices, it is estimated that actual subsidy may reach at Rs 150 billion even if 2 percent power tariff hike is continued every month.

The buoying fiscal deficit would more certainly forced the government to curtail its developmental spending, thus reducing imputes for growth. Furthermore, with higher reliance on the domestic sources, it will either induce above expectation inflation (SBP borrowing) or would create a crowding out effect (commercial bank borrowing). Either way it would advocate the central bank to keep the interest rate at elevated levels. Thus, fiscal discipline would be the chief determinant o f future monetary policy stance.

In Federal Budget FY12, the government aims to curtail the fiscal deficit at 4.0 percent of the GDP (or Rs 851b), with major reliance (84 percent) on the domestic resources to bridge the deficit. It is believed two imminent threats i.e. ambitious tax revenue target and lower electricity subsidy, may escalate the deficit above the target level. Subject to external flows, buoying fiscal deficit may in turn strain the domestic interest rate environment.

Therefore, with external account faced with adverse prices shock (subdued cotton prices-inflated oil prices) and limited inflows, we believe interest rates would now depend on the fiscal discipline of the government.

The government has envisioned total tax collection target of Rs 2.07tn, up 23 percent from revised target of Rs 1.68tn last year. Despite new tax measures announced in the budget, experts believe the target is on the higher side. Firstly, it is expected government to collect Rs 70b instead of targeted Rs 120b in lieu of PL (Petroleum Levy). Secondly, ambitious target growth of 19 percent and 28 percent in income and sales tax collection, respectively, would solely be dependent on the implementation of the tax rationalization measures.

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