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Economic notes

October 10, 2017

Fiscal challenges


October 10, 2017

The two immediate challenges facing the economy are fiscal and external accounts sustainability. They are inextricably linked. Indeed, fixing the fiscal would have a salutary effect on the external.

The fiscal troubles emerged at the close of the last budget 2016-17, whose final figures were known only in early September. Against a target of 3.8 percent of GDP, the actual deficit was 5.8 percent. The target for 2017-18 is 4.1 percent. In an earlier article (September 18, 2017) we had indicated that after making adjustments for several missing elements, the budget might be off by some 2.3 percent at the outset of the fiscal year [Note: 1 percent of GDP is Rs360 billion]. With such heavy odds, how can the fiscal pressures be eased?

Revenues: The FBR’s performance for the first quarter Jul-Sep is encouraging. The FBR’s target is Rs4013 billion compared to last year collections of Rs3361 billion, a growth of 19.4 percent. In the first quarter, the FBR has collected Rs757 billion, showing a growth of 21 percent compared to Rs625 billion collected during last year. Thus, FBR collections are on target and amounts to a solid beginning compared to previous years.

Regarding the performance of collection of non-tax revenues the information is yet to be published. A key non-tax revenue is the gas cess that remains mired in legal challenges and disputes with CNG owners. Both have to be resolved to avoid as big a slippage as last year, when against Rs142 billion only Rs42 billion were collected. Another big item is the defence receipts or coalition support fund (CSF). Last year, against the budget of Rs170 billion, only Rs70 billion were received. As is evident, chances of significant flow in this head are low. Evidently, we need to do some hard work to achieve the targets here.

Expenditures: Data on expenditures is not readily available even though the civil accounts are compiled within two weeks of the close of the month. Such data is made available on a quarterly basis (with at least a one-month lag) and thus we need to work indirectly to ascertain the state of play in this area. On the current side, the areas of utmost concerns are the subsidies related to electricity, fertilizers, unanticipated security expenditures and proposed rebates to exporters, all of which were not properly budgeted.

A peek into the development expenditure is provided by data on releases compiled by the planning division. The releases in the first quarter are Rs170 billion, which is nearly 20 percent of the total PSDP of Rs840 billion. This, however, would not mean actual disbursement as the finance division takes time in according ways and means clearance. Given the fiscal state, we feel this may be a fast pace of expenditure. As we had recommended, there must be a freeze on development spending other than CPEC and foreign commitments because the country is passing through a turbulent phase and revenues are significantly below the projected levels.

Fiscal deficit: This last assertion is borne out by SBP data on monetary aggregates. The budgetary borrowings by the government as on 23 September amounted to Rs391 billion, of which Rs147 billion were from SBP and Rs244 billion from commercial banks. The true deficit would work out after adding borrowings from external sources and national savings. Last year, the latter two sources contributed 40 percent of the deficit. If we assume the same ratio, another Rs260 billion would be added to Rs391 billion to arrive at an estimate of Rs651 billion for the deficit in the first quarter, which is 1.8 percent of GDP. One needs to subtract government deposits in the banks to arrive at the deficit figure. But we have good ballpark estimate. This is clearly unsustainable and much beyond the budgetary target of 4.1 percent for the year. At this rate, the deficit could be as high as 7.3 percent.

Budget financing: One of the key reforms accomplished under the Fund programme was the limit on SBP financing for the budget (which essentially amounts to printing notes). In 2013, the stock of SBP debt owed by the federal government was around Rs2.5 trillion, which further rose to Rs2.7 trillion in the initial months after the start of the programme. One of the performance criteria, rigorously examined and checked every quarter, was to bring it down to Rs1.5 trillion during the programme period. This required shifting this debt to other sources. This was duly accomplished.

Unfortunately, last year saw a major reversal in this area as the government borrowed Rs907 billion from the SBP, which was nearly 50 percent of its total borrowings of Rs1848 billion. In the first quarter, with a borrowing of Rs147 billion, this trend is continuing. It is clear that the government has chosen to do so for fear of raising the interest rate or lack of demand from the market long-term government paper. This state of affairs is not in line with the provision of Section-9C of the SBP Act 1956 that requires full retirement of borrowing at the end of each quarter (9C(1)), besides the obligation to eventually retire the full stock of debt (9C(2). The positive story on monetary expansion, however, is that more credit (Rs748 billion) was available to the private sector by commercial banks, the highest ever in a single year.

It is our considered view that the broader economy of Pakistan is perhaps passing through one of its finest times: rising growth, low inflation, adequate real supplies (industry, agriculture), increasing foreign savings and high consumer spending. Yet, all this progress is threatened by policy choices that are not supportive of sustaining this momentum. It is absolutely imperative to arrest the drift in our fiscal management before it is too late.


The writer is a former finance secretary. Email: [email protected] 

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