KARACHI - In a bid to finance runaway deficit spending in the absence of tax reforms, the government has been advised to use its own and public sector entities deposits held with scheduled banks rather than printing more money and borrowing massively from the central bank and other non-banking sources for budgetary support. The current fiscal gap, which increases difference between the government expenditure and revenue, can also be narrowed somewhat by offloading a few shares of the selected profit-making public sector enterprises through the issuance of initial public offerings (IPOs) at the local capital market. These measures can be taken up in the short-to-medium term basis, which are expected to provide a small level of respite to the national economy by easing fiscal pressures pertaining to higher public expenditures caused by greater than budgeted subsidies over the second half of the current financial year till onwards. Keeping in view the persistent surge in rate of inflation, to borrow from the central bank is not a suitable fiscal policy even if the alternative options are available there. Currently, the commercial banks hold Rs500 billion worth deposits of the government and the non-financial public sector enterprises including federal and provincial government organisations in their accounts. This seems quite surprising given the substantially high government borrowings from bank and non-bank sources, said Sayem Ali, an Economist at Standard Chartered Bank. It is pertinent to note that government deposits held in existing accounts with various banks amounted to Rs454.8 billion as of end June 2009. He further said the government can mange revenue through offloading 5 to 10 per cent shares of some public sector entities in the oil and exploration sectors like PSO, PPL, and PRL at the Karachi Stock Exchange. These companies shares may offer to the local and foreign investors with an aim to reduce income shortfall and to accelerate revenue growth, as the stocks of these companies performing well, increasing foreign buying at the equity market. In case of taking such initiative measures, the higher fiscal deficit may be financed in the near future. The fiscal deficit is widening continuously due to delays in tax reforms and is expected to increase to 6.5 per cent of GDP, against the revised budget target of 4.7 per cent of GDP. Moreover, if the deficit grows at the current pace, then it could shot up to 7.5 per cent of GDP by the end of this financial year. It means the government would need to borrow over Rs1 trillion from the SBP to finance a large part of its deficit by borrowing from the central bank, which will fuel inflation. The deficit for the July-December 2010 reached 1.5 per cent of GDP. According to a World Bank-funded study, this would generate additional revenue equivalent to 3.8 per cent of GDP by bringing the services industry into the tax net and removing exemptions currently enjoyed by different sectors. It would also facilitate the transparency of the economy and set the stage for second-round tax reforms focusing on raising taxes on property and agriculture income. These tax measures would limit the build-up of public debt over the medium term, which rose sharply to 62.5 per cent of GDP in June 2010 from 54 per cent of GDP in June 2007. Sacrifices and toughs decisions are needed for the runaway deficit. The government must reduce its size and cut non-productive spending by 30 per cent in order to meet public expenditures. Ina addition deep cuts in development budgets for instance ADP, PSDP and defense budget are likely to take place. The provinces will have to devise an effective revenue mechanism by generating surplus income other wise the economy would be standstill, said an analyst. According to SCB report, the economy is struggling to deal with the aftermath of 2010s heavy floods, with an estimated 20million people affected. Foreign assistance has been slow and the bulk of the rehabilitation and reconstruction costs have been met via domestic resources, fuelling inflation and forcing the government to cut subsidies and introduce new tax measures. These are deeply unpopular and have drawn sharp criticism from coalition partners and opposition parties. While the PPP-led government is likely to survive the latest political crisis, it no longer has sufficient support in parliament to pass the tax reforms committed to under the USD 11.3bn IMF Stand-By Arrangement (SBA). Question marks remain over the future of the USD 3.4 billion IMF funds withheld since May 2010 due to non compliance with programme targets. The IMF Board has extended the SBA loan to September 2011, but the government lacks the strength to push through the tough reforms needed to stabilise the economy and bring down inflation. Pakistans fiscal position deteriorated in 2010 due to delays in tax reforms, leading to the suspension of aid disbursement from the IMF and other donor agencies since May 2010. The key reform targeted was the broadening of the General Sales Tax (GST) base through inclusion of the service sector and the elimination of tax exemptions/special treatment available under the existing sales tax regime.