FISCAL DEFICIT

PAKISTAN

FEBRUARY 25, 2021

MUHAMMAD JAHANZAIB CH
009
 FISCAL DEFICIT

Fiscal Deficit is the difference between the total income of the government and its
total expenditure. A fiscal deficit situation occurs when the government’s
expenditure exceeds its income.
This difference is calculated both in absolute terms and also as a percentage of the
Gross Domestic Product (GDP) of the country. A recurring high fiscal deficit
means that the government has been spending beyond its means.

Fiscal Deficit = Total expenditure of the government (capital and revenue

expenditure) – Total income of the government (Revenue receipts + recovery
of loans + other receipts)

If the total expenditure of the

government exceeds its total
revenue and non-revenue receipts
in a financial year, then that gap is
the fiscal deficit for the financial
year. The fiscal deficit is usually
mentioned as a percentage of
GDP.
For example,
If the gap between the expenditure and total income is Rs 5 lakh crore and the
country’s GDP is Rs 200 lakh crore, the fiscal deficit is 2.5% of the GDP.
What causes Fiscal Deficit?
Sometimes, the governments spend on handouts and other assistance to the weak
and vulnerable sections of the society such as the farmers and the poor. A high
fiscal deficit can also be good for the economy if the money spent goes into the
creation of productive assets like highways, roads, ports, and airports that boost
economic growth and result in job creation.
How is Fiscal Deficit met?
The government meets fiscal deficit by borrowing money. In a way, the total
borrowing requirements of the government in a financial year is equal to the fiscal
deficit in that year.
Fiscal policy and its impact on GDP:
Fiscal policy has a significant role in creating an equitable distribution of income
and wealth in society. Particularly, better fiscal management helps mobilize
domestic savings and increase the efficiency of resource allocation. Consequently,
it paves the way for achieving macroeconomic stability along with promoting more
sustainable and inclusive growth.
Historically, whenever Pakistan’s economy has witnessed higher growth, it was
unsustainable because it created macroeconomic imbalances. The growth was
largely driven by consumption-led spending as opposed to investment. The non-
productive nature of this growth caused higher external and fiscal imbalances.
Consequently, it has seriously undermined the growth prospects. Furthermore,
structural weaknesses like weak tax administration, a difficult business
environment, low tax to GDP ratio and insufficient resources further aggravated
the situation.
In 2018, the economy was at a critical juncture due to rising debt and liabilities,
high current account and fiscal deficit, depleting foreign exchange reserves and
circular debt. In particular, persistently high fiscal deficit due to income-
expenditure mismatch resulted in an unsustainable level of public debt, which in
turn, became the major source of macroeconomic imbalance. In the wake of these
challenges, the government introduced adjustment and demand management
policies to ensure economic and financial stability and to improve the growth
prospects. Similarly, Pakistan entered into 39-months Extended Fund Facility with
IMF for the $ 6.0 billion to support the government’s reform program.
These measures helped in handling macroeconomic imbalances, particularly, the
constraints on the fiscal side were put on the path of fiscal discipline and fiscal
consolidation. During the first nine months of the current fiscal year, all major
fiscal indicators have witnessed a marked improvement owing to government’s
stringent fiscal strategy to improve the revenues through comprehensive tax
measures and administrative reforms along with expenditure rationalization. The
persistence of these measures would be supportive in addressing a large primary
deficit to ensure debt sustainability over the medium term.
Further, with the promulgation of the Public Finance Management Act 2019,
budgetary management is being strengthened and it will encourage fiscal discipline
and transparency, going forward.
During the first nine months of the current fiscal year, the performances of fiscal
indicators suggest that fiscal consolidation is on track. Overall fiscal deficit
reduced to 4.0 percent of GDP against 5.1 percent of GDP recorded in the same
period last year while primary balance posted a surplus of Rs 194 billion during
July-March, FY2020 against the deficit of Rs 463 billion during the comparable
period of FY2019. Total revenues grew by 30.9 percent during July-March,
FY2020 against 0.04 percent growth during the same period of FY2019, on
account of a substantial rise in both tax and non-tax revenues. Similarly, on the
expenditure side, PSDP spending witnessed a significant rise both at federal and
provincial levels. Overall PSDP expenditure grew by 24.9 percent during July-
March, FY2020 over the previous year.
However, the outbreak of Coronavirus (COVID-19) has negatively affected the
near-term outlook. It has brought significant challenges for the economy by
squeezing the economic gains achieved during the ongoing fiscal year. In
particular, fiscal accounts are expected to come under tremendous pressure.
On one hand, the Government is focused on increasing the expenditures on public
health and strengthening social safety net programs, while on the other, it intends
to mitigate the impact of the COVID-19 on the economy. In doing so, the budget
will therefore temporarily deviate from initial targets. On the revenue side,
achieving targets of both tax and non-tax would be challenging owing to disruption
in economic activity, manifested through both demand and supply shocks. The
budget deficit is expected to exceed the target set for FY2020.
Nevertheless, the Government has acted in a timely and well-calibrated manner to
lessen the detrimental effects of COVID-19. It has taken appropriate measures to
support the economy through fiscal and monetary policies. On the fiscal side, a
comprehensive fiscal stimulus package has been initiated in order to accommodate
the expenditures required to mitigate the impact of the COVID-19 shock. The
package has created stress on fiscal flows, however, the impact may become severe
if the pandemic lasts for a longer time period. State Bank of Pakistan has
responded timely through appropriate monetary policy response. The measures
have been aimed at a reduction in the policy rate and introduction of various ways
to improve the liquidity of, particularly small-scale businesses. It has introduced
various other temporary and time- bound actions which will ensure monetary
stability and functionality of the financial system in the wake of COVID-19 crisis.
In order to meet the financing requirement for these expenditures, additional
resources have also been mobilized through various international financial
institutions including IMF, World Bank, ADB etc. The government is constantly
monitoring the situation in the country and accordingly additional measures are
being deployed to meet the emerging requirements.
Production structure of Pakistan power sector
Electricity in Pakistan is generated, transmitted, distributed, and retail supplied by
two vertically integrated public sector companies, Water and Power Development
Authority (WAPDA) for all of Pakistan (except Karachi), and the Karachi Electric
(K-Electric) for the city of Karachi and its surrounding areas. There are around 42
independent power producers (IPPs) that contribute significantly in electricity
generation in Pakistan.
The following breakdown explains the structure of Power sector entities in
Pakistan and their role in policy formation and its implementation, management,
operation and maintenance to provide electricity to the consumers.

History
Pakistan electricity sector is a developing market. For years, the matter of
balancing the country's supply against the demand for electricity had remained a
largely unresolved matter. The country faced significant challenges in revamping
its network responsible for the supply of electricity. Electricity generators were
seeking a parity in returns for both domestic and foreign investors indicating it to
be one of the key issues in overseeing a surge in electricity generation when the
country was facing growing shortages. Other problems included lack of efficiency,
rising demands for energy, and political instability. Provincial and federal
agencies, who are the largest consumers, often do not pay their bills. At one point
electricity generation had shrunk by up to 50% due to an over-reliance on fossil
fuels. The country was hit by its worst power crisis in 2007 when production fell
by 6000 Megawatts and massive blackouts followed suit. Load Shedding and
power blackouts had become severe in Pakistan before 2016.
Economic Survey 2019-20 unfolds that Pakistan's installed capacity to generate
electricity has surged up to 37,402 MW by June 2020 which stood at 22,812 MW
in June 2013, showing the growth of 64 percent.
Power Sector:
Pakistan has following main Public and Private Producers of power which are
1. Water and power development authority (WAPDA)
Hydel Power
2. Generation Companies GENCOs(Public)
Thermal Power
3. Pakistan atomic energy commission(PAEC)
Nuclear Power
4. Karachi electric supply company(KESC)
Thermal Power
5. Independent power producers (IPPs)
Thermal Power
Hydel power
Hydro Power:
Moving power is used to extract energy
by using electricity generators for hydro
power generation. The energy of moving
water can be very high. Hydro power has
been used for centuries to generate electricity. Hydro power became the first cause
to generate electricity in late 19th century and Niagara Falls was the first city in
Canada where first hydroelectric power plant was built in 1879. Initially energy
produced from that power plant was used to power street lamps in Niagara city.
Electricity produced from hydro power is cheap, clean and indigenous form of
energy.
Electricity provided by hydroelectric power plants is almost one- fifth of world’s
electricity.
A typical hydroelectric power plant working phenomenon is very simple and
requires three parts which are Power station for electricity production, a dam to
control water flow and a reservoir to store water.
Water runs a turbine inside power station/house where generator is used to convert
its mechanical energy to electrical energy. The amount of electricity that can be
produced is dependent on water level and how much water is moving through the
system. A transformer is used to raise its voltage and then transferred to the grid.
Pakistan has 23 hydroelectric power plants including three mega dams Tarbela,
Mangla and Ghazi Barotha. Almost all of which lie in the K.P.K, Punjab and AJK.
These power plants are mostly made on river Indus, river Jhelum, and on some
small canals. Installed capacity of these hydro power Plants is
 7115 MW out of which 4304 MW is in Khyber Pakhtunkhwa,
 1699 MW in Punjab and
 1114 MW in AJK.
Total production of these power plants is 32074
GWh which is 34% of total power generation of Pakistan.
Table 1 below shows location, nominal power, mean power, generation and
capacity factor of various hydro power plants in Pakistan
THERMAL POWER:
A power plant where heat energy
is converted into electrical power
is called thermal power plant. In
thermal power plant operation,
first water is heated, and steam is
produced from that heated water which spins a steam turbine and that runs a
generator. Actually, High temperature and high-pressure steam is responsible for
the rotation of turbine and this rotation is then transferred to generator for
electricity production. In ranking cycle, a condenser is used to condense the steam
and is recycled to where it was heated before.
Classification of thermal power plants
By fuel:
1. Fossil fuels Power plant (Thermal):
Fossil fuels such as coal, natural gas or petroleum oil are burnt in this type thermal
power
plant to produce electricity. They are designed on a large scale for continuous
operation. A steam turbine is used in this type of power plant whereas in natural
gas fired plants a combustion turbine is used. In coal burning process a lot of
carbon, di oxide gas is released to the atmosphere and contributes to global
warming which clearly is a side effect of this process.
Natural gas is regularly flamed in gas turbines and boilers. The waste heat from a
gas turbine can be used to raise steam, in a combined cycle plant that improves
overall efficiency.
2. Biomass fueled power plants:
Currently, most biomass power plants burn lumber, agricultural or construction
wood wastes. Biomass fuel is burnt in direct combustion power plants boilers that
supply steam for the same kind of steam electric generators used to burn fossil
fuels. In this process biomass is converted into methane gas which can then fuel
steam generators, combustion turbines and fuel cells.
By prime mover
1. Steam turbine plants:
In steam turbine power plants the dynamic pressure generated by expanding steam
is used to move the blades of the turbine. This system is quite common in almost
all non-hydro power plants. Using steams turbines produces about 80% of world
electric power.
2. Gas turbine power plants:
A Gas turbine power plants basically works on three main things:
The compressor: Compressor draws air into the engine, pressurize it and load it to
the combustion chamber at a very high speed.
Combustion system: It injects a regular supply of fuel to combustion chambers
where it mixes with air. This mixture is then burnt at a very high temperature. A
high pressure gas stream is that which enters through the turbine section.
A turbine: As hot combustion gas expands through the turbine, it spins the rotating
blades.
The rotating blades spins a generator to produce electricity.
3. Combined cycle plants:
Both gas and steam turbines are used together in a combined cycle power plants to
produce electricity. The waste heat from the gas turbine is routed to the nearby
steam turbine, which generates extra power.
Most of the electricity in Pakistan is produced from thermal power plants by using
resources like oil, gas and coal. Some of them are combo-cycled, steam turbine and
gas turbine. Total number of thermal plants in Pakistan are 49 located in Punjab,
Sindh and Baluchistan.
Pakistan is producing 61% of electricity from Thermal power. Total thermal
installed capacity of Pakistan is 16599MW. The biggest thermal power plants are
Guddu with capacity 2402MW, TPS Muzaffargarh 1350MW, Kot Addu with
1638MW capacity and HUBCO
Baluchistan with 1200MW capacity. The oldest one is NGPS Multan, made in
1960 with installed capacity of 195MW. Pakistan have recently installed three
biomass fuelled power plants with 67MW capacity.

Nuclear Power:
Nuclear plants produce electricity
by boiling water into steam. This
steam is then used to turn turbines
in Nuclear power plant for
electricity generation. Uranium
fuel is used which consist of some ceramic pellets for electricity production in
Nuclear power plants. The process of producing electricity in nuclear plants is
called fission. The first commercial Nuclear power station started working in
1950s. About 440 commercial nuclear reactors are operating in 31 countries with
over 380,000 MWe of total capacity and approximately about 65 more nuclear
reactors are under construction.
Pakistan Atomic Energy Commission (PAEC) is responsible for all nuclear energy
and research applications in the country. Because of International Atomic Energy
Agency doubt to use nuclear power plants for military usages, Pakistan is largely
excluded from trade in nuclear power plants or materials, which slow down its
development of civil nuclear energy but china is ready for nuclear co-operation
with Pakistan. Pakistan’s first nuclear power reactor KANUPP with 137MWe
capacity started in 1971 and is located in Sindh province about 25km west of
Karachi. Pakistan is producing only 3% of total electricity from three nuclear
power plants which has total capacity 787MWe. More details of Nuclear power
plants
Wind Power:
Wind is a clean source of renewable energy
with no air or water pollution, unlike
conventional power plants, wind plants emit
no air pollutants or greenhouse gases.
Farmers use Windmills to grind grains and
pump water. Today many wind turbines are
used to extract electricity from breeze. The
first windmill was built in Scotland in 1887 for electricity production. Even though
wind turbines are increased about 25% a year during past decade but still it
provides a small amount world’s energy.
Wind turbines can be as tall as 20 story building and normally have three long
blades. The wind spins the blades, which turns the shaft connected to a generator
that produces electricity. Germany has the most installed wind energy capacity,
followed by Spain, United States, India, and Denmark.
Due to increase in cost of fossil fuel and different environmental problems,
Pakistan is working to produce electricity from renewable resource like Wind and
solar power. Currently 5 wind power projects with installed capacity of 255.4 MW
are in operation. Wind power contribution to Pakistan’s total power production is
less than 1%. Last year total wind power production of Pakistan was 457GWh.
Solar Power:
Solar power is produced by
storing sunlight and converting it
into electricity by solar panels.
Solar power is mostly used in
remote areas. Solar thermal
power plants uses different
techniques to apply sun energy
as heat source. With most
commonly used Photovoltaic
electricity where photovoltaic absorbs direct sunlight. This solar radiation is
converted into direct current electricity (DC). Direct current that flows from solar
panels is converted into Alternating current (AC) used by local utilities. At last,
electricity travels through transformers and the voltage is boosted for delivery onto
the transmission lines and is distributed to consumers.
Pakistan is in initial stages to produce the electricity through solar power. Pakistan
is building solar power plants in Punjab, Sindh and Baluchistan. These programs
are under development by the International Renewable Energy Agency, China,
Sweden, and Pakistan
Alternate Energy Development Board (ABED). May 2015 Pakistan launched its
first solar power plant called Quaid-e-Azam Solar power Plant with 400,000 solar
panels spread over 500 acres (202 hectares) of sun-baked southern Punjab
Province. This solar Park has 100 MW of nominal power which is less than 1 % of
total installed capacity of Pakistan. This capacity will be increased to 1500 MW in
two year.
The generation of this plant was 26 GWh in 2015 which is less than 1% of total
power generation in Pakistan. The plant is built by China's Tebian Electric
Apparatus Stock Co Ltd (TBEA), took a year to build at a cost of $190 million.
Installed capacity
According to the Pakistan Economic Survey 2019–20, the installed electricity
generation capacity reached 37,402 MW in 2020. The maximum total demand
coming from residential and industrial estates stands at nearly 25,000 MW,
whereas the transmission and distribution capacity is stalled at approximately
22,000 MW. This leads to a deficit of about 3,000 MW when the demand peaks.
This additional 3,000 MW required cannot be transmitted even though the peak
demand of the country is well below its installed capacity of 37,402 MW.
Electricity concerns
Although Pakistan has reduced blackouts and increased electricity production
significantly, blackouts are still common, and the price of electricity has still
increased. Recent tariff have contributed to this increase in prices.
The latest blackout happened in Pakistan on 9 January 2021 at 11.41pm local time
(1841 GMT) on Saturday. It happened due to an engineering fault in the Southern
Punjab. Hence, Pakistan is still facing electricity concerns, but the government is
trying to come up with solutions to avoid such incidents in the future.
Electricity generation
Electricity – generation: 134,745.70 GWh (FY2019-20)
Electricity – generation by source (FY2019-20)
Furnace oil: 14% of total
Natural gas: 31% of total
Coal: 16% of total
Hydroelectric: 29% of total
Nuclear: 4% of total
Renewable (solar & wind): 5% of total
Others (Bagasse, Waste Heat Recovery etc.): 1% of total

Electricity consumption
Pakistan can provide itself completely with self-produced energy. The total
production of all electric energy producing facilities is 134,745.70 GWh, also
119% of own requirements.
Pakistan’s Electricity Consumption: Total data was reported at 109,459.000 GWh
in 2019. This records an increase from the previous number of 106,927.000 GWh
for 2018.
The rest of the self-produced energy is either exported into other countries or
unused. Along with pure consumptions the production, imports and exports play an
important role. Other energy sources such as natural gas or crude oil are also used.
The End