The ‘ambitious’ deficit targets are obviously proving difficult to achieve. To a large extent, this has been due to short-term Inflexibilities in public expenditures — mandatory, statutory and contractual obligations. In what follows, we will refer to these simply as ‘Inflexibilities’. These Inflexibilities, their size and growth, “limit the space for fiscal maneuver” (IMF Country Report, August 2009, paragraph 22: emphasis added) which needs to be opened up if oil revenues are to be dedicated to infrastructure and institution building.
The Deficit and its Financing
The vulnerabilities in the fiscal outlook identified from the analysis of the first half year developments include the following:
• Overall total revenue and grants outturn is likely to prove worse than projected in the budget. This is largely on account of the impact of the fiscal-drive on aggregate demand of the economy;
• Discretionary spending including public sector wage bill and development spending will also exceed the target set,
• Moreover, a repeat of last year’s domestic interest payments would also exceed the target, and
• Even with unplanned accumulation of payment arrears, the cash deficit, in all probability, would exceed its target of 8 percent of GDP by considerable margin.
Net domestic financing of the deficit could sustain the stubbornly high lending rates charged by the commercial banking system, particularly the indigenous SMEs. The negative implications of these high rates “......... for capital spending, private sector growth, stability of the banking system and hence the overall economic growth” have been extensively discussed elsewhere (for example, paragraph 34, MPC Press Release, July 16, 2010). Finally, the anticipated slow growth in GDP in 2010 implies that the process of fiscal consolidation may be delayed as tax revenue targets failed to be achieved.