One thing Ishaq Dar is good at is to be on the same page with multilateral agencies, especially the IMF. He got their nod on the seventh review with no red marks. But when luck is favouring you, as exogenous factors coupled with stabilization policies are reaping fruit in terms of low inflation, building reserves and curtailed fiscal deficit, it is the right time to transition to a growth strategy.
But the Finance Minister seems to be preoccupied in managing optics. The GDP growth has been curtailed by 0.2 percent to 4.1 percent by IMF and next years target is not encouraging either. The problem is that the IMFs prescription is not providing much room for fiscal and monetary stimuli to spur growth momentum while Dar's love with sticky exchange rate (though IMF has different stance on it) is exacerbating the trade balance.
In the process, economic growth and employment generation have been compromised. The finance ministry, in consultation with the Fund, is setting a fiscal deficit target of 4.3 percent for next year against the earlier promised four percent. This increase is aimed at taking care of extraordinary spending (Rs130bn) on army operations and to maintain internal security. It is always good to budget the inevitable expense but Dar could have argued for higher PSDP to generate employment and its multiplier benefits on the private sector.
The problem with committing to overambitious revenue targets is that expenditures on development have to be sacrificed when commensurate revenues aren't raised. Its hard to believe that a fiscal deficit of 4.3 percent of GDP can be attained in FY16. There is no way tax revenues will reach Rs3.2 trillion next year. But don't take our word for it! Just look at this year's performance to find out how illusionary are the targets.
FBR has underperformed this year despite all the finance ministry efforts to attain revenue collection targets. The initial target was Rs2,810 billion which was revised down to Rs2,690 billion. But based on ten months performance, it appears only remotely possible that the full year target will be achieved. Based on 13 percent growth so far, FBR will, at best, collect Rs2560 billion in FY15. Mind you, sales tax refunds amounting to Rs118 billion are also part of this tally and should rightfully be deducted from the year-end collection tally.
Hence, on the low base of actual numbers of FY15 collection, 24 percent growth is required in FY16 to achieve the target of Rs3,200 billion. How on earth can this be achieved? Why can't our economic managers be realistic in setting targets?
Nonetheless, there is a shortfall of Rs240 billion by FBR in relation to the initial target of FY15 (Rs2,810 billion) and then the government is massively short on GIDC collection of Rs145 billion (collected: Rs15bn). Much of the gap is likely to be filled by a cut of Rs300 billion in both federal and provincial PSDPs to shave the shortfall down to Rs70 billion.
There are some expenditure overruns in financing the circular debt and higher security spending on army operations - the overall expenditures are likely to expand by Rs100-Rs150 billion. To add the two, fiscal deficit might be widened by Rs180-230 billion or 0.6-0.8 percent of GDP from budgeted 4.9 percent of GDP.
The fear is that some creative accounting may come into play by showing privatization receipts (HBL and ABL) above the line. However the law binds the finance ministry from placing it for financing of fiscal deficit (as per law). They did this maneuvering last year in case of UBLs privatization by booking the amount in SBPs profit - which was booked to Rs260 billion against budgeted Rs200 billion and may do the same for other banking companies this time as well. So Rs100 billion of deficit will be misappropriated to reduce the deficit gap to Rs80-130 billion or 0.3-0.5 percent of GDP.
Then there is a problem of circular debt piling up again for a whole number of reasons. Some estimates suggest the debt has increased to Rs280 billion while over Rs300 billion receivables are parked in a power holding company. One of the reasons for high circular debt is that tariff differential subsidies are under provided to keep the fiscal deficit in check. Dar may not clear that in June and will transfer it to next year with some creative adjustments.
In 2013-14, it lowered the fiscal deficit by showing Pakistan Development Fund (Rs157 bn) coming from Saudi Arabia as statistical discrepancies which were as high as Rs215 billion. Sooner or later that money is to be used for development. Now, if for next year (2015-16) they go for taking this money from outside the budget, they will have to raise the fiscal deficit of 2013-14 which Dar and company would not do. Rather the finance ministry will show it as internal transfers from the Federal Consolidated Fund to make it part of the upcoming budget.
Many similar steps will be taken in 2015-16 too, on paper: tone down the deficit or raise revenues. The accounting mastery will work here and there to keep the optics right. Who cares about actual development anyway?
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