Analysts see "election focus" for Pakistan budget

ISLAMABAD (Reuters) - Pakistan is set to announce several populist measures in the budget for the 2007/08 fiscal year, which analysts said would be aimed at winning support for the government in elections due late this year or early in 2008.

Officials said no new taxes were likely to be imposed, while subsidies worth 200 billion rupees ($3.3 billion) were set to be part of an estimated 2 trillion rupee budget for the fiscal year starting on July 1, due to be announced on Saturday.

"This budget will largely be an election-focused budget and is expected to include subsidies and measures such as an increase in salaries and pensions," said independent economist Kaiser Bengali.

Bengali said the government might announce new development programs to win support, but added that could have a negative impact on inflation.

"The best way to avoid inflationary pressures is to curtail non-development spendings, such as on defense and the government's own expenditures, and direct those funds towards development," he said.

Rising prices are already a challenge. Average inflation is likely to be close to 7.7-7.9 percent for the 2006/07 fiscal year, against a target of 6.5 percent.

The coalition government is led by Prime Minister Shaukat Aziz, a former Citibank executive whom President Pervez Musharraf first made finance minister, then prime minister after getting him elected to the National Assembly in 2004.

Aziz is credited with much of the economic reform carried out in Pakistan over the past seven years.

The budget allocation for public sector spending in 2007/08 is expected to be 720 billion rupees, including a Public Sector Development Programme of 520 billion rupees -- nearly 20 percent higher than this fiscal year, officials said.

Out of this, 35 billion rupees would be spent on reconstruction in areas hit by a 2005 earthquake, while the remainder would be spent equally on infrastructure development and the social sector, officials said.

FISCAL DISCIPLINE

The government says the economy is expected to grow by 7.02 percent in 2006/07 and the target for the next fiscal year is 7.20 percent.

Salman Shah, adviser on finance to Aziz, said the government would achieve the fiscal deficit target of 4.2 percent of GDP for 2006/07, while the target for the next fiscal year will be about 4.0 percent.

Some analysts say that could be tough.

"One potential area of concern next year would be fiscal discipline," said Sakib Sherani, chief economist at ABN Amro bank.

The government will have to make an extra effort to generate healthy tax revenue if it wants to maintain fiscal discipline, given the huge development spending envisaged for 2007/08, he said.

The government says it will set a revenue target of more than 1.0 trillion rupees for next year. It expects to collect 830 billion rupees this year.

"I think both corporate profitability and imports are currently at their peak, and hence it could be difficult to achieve 20 percent growth in revenue collection next year," said Sherani.

A likely increase in the minimum wage would also put pressure on the profitability of industries and could thus hamper revenue growth, analysts said.

They also see a need to broaden the tax base -- only about 1.36 million people are registered as taxpayers out of a population of 160 million.

Despite some improvement, poverty is still widespread in Pakistan, with 23.9 percent of the population living in poverty in 2004/05 compared with 34.5 percent in 2000/01.

(With reporting by Augustine Anthony)