Government likely to face dilemma in announcing unpopular fiscal measures

Upcoming budget FY18

KARACHI: Government is bullish on growth prospect, but it may face challenges in announcing unpopular fiscal measures to sew up tattered finances in a budget for the fiscal year of 2017/18 ahead of the general elections next year, analysts said on Wednesday.

Analysts said political considerations ahead of the 2018 polls are likely to bring about, in fact, some populist measures (e.g., above-inflation increases in public-sector salaries) and a higher subsidy allocation for the power sector.  

“Oil prices may rise and in elections year (and) the government may prefer to reduce sales tax rates on petroleum products, rather than let prices go up,” said Hafeez Pasha, an economist.

“There is even greater likelihood of an out of control budget deficit next year… the deficit could reach a record level of Rs2.1 trillion next year, equivalent to almost six percent of the projected GDP.”

Bilal Khan, a senior economist at Standard Chartered Bank said further fiscal consolidation may prove to be incompatible with an emphasis on higher growth.  

“We think the policymakers are likely to prioritise GDP growth,” Khan said. “(Finance Minister Ishaq) Dar may target a fiscal deficit of 3.5-3.8 percent of GDP for FY18, (while) he is expected to announce a six percent GDP growth target, up from a provisional estimate of 5.3 percent for FY17.”

He said the Federal Board of Revenue’s tax collection target is likely to be set at Rs4.0 trillion (in FY18) – over 10 percent more than the FY17 target of Rs3.6 trillion. “This (target) may prove to be ambitious,” he added.

Economist Ashfaque Khan also lent support to an argument that fiscal consolidation and higher real GDP growth is contradictory to each other.

The government has set the highest-ever public sector development programmes of Rs1 trillion for FY18, 25 percent higher than Rs800 billion allocation for FY17. 

The allocations, analysts said, would be positive for growth. The bulk of the spending would be for infrastructure projects under the China-Pakistan Economic Corridor.

Estimates expected budget deficit for FY17 at 4.8 percent. The nine-month FY17 deficit is already 3.7 percent.

The current fiscal year’s growth is expected at 5.2 to 5.3 percent, highest in the past nine years.

Pasha said the last three years witnessed a steady decline in the consolidated budget deficits during the three-year tenure of the International Monetary Fund’s program, which concluded in September 2016.

“Normally, the deficit incurred in the last quarter of a financial year is about 30 percent of the annual deficit,” he added. “The budget deficit in 2016/17 will reach Rs1,884 billion or 5.6 percent of the GDP. In effect, this will represent overshooting of the annual target by as much as Rs508 billion.”  

The economist said tax revenues have shown only half the growth anticipated because with rise in oil prices the windfall revenue gains have largely vanished. Second, there has been precipitous decline in non-tax revenues. This is partly due to substantially reduced inflow from the coalition support fund. 

Moreover, the cost of debt servicing has already risen faster than the projected level by more than Rs 170 billion.

Costs of debt servicing will continue to rise due to a higher component of commercial borrowing and larger public debt outstanding.

Coalition support fund inflows, which peaked more than Rs150 billion, are unlikely to be fully restored. Up to now, in 2016/17, only 38 percent of the budgeted amount has been received.

State Bank’s profits will not rise sharply in the presence of low interest rates. Security expenditure will continue to have the necessary high priority and rise significantly as the military operation Raddul Fasaad continues.

Overall, analysts said there will be pressure in 2017/18 to retire a large part of the circular debt in order to ensure liquidity and enable the expansion in capacity to lead to more power generation, with much less load shedding, prior to the elections.