Think Tank Institute for Policy Reforms on Thursday relased a fact sheet on budgetary outcome in first quarter of 2015-16. According to this fact sheet, the results of fiscal operations of the federal and provincial governments in the first quarter of 2015-16 have just been released. The numbers reveal, first, the continued existence of some structural problems on the fiscal front and, second, ways and means whereby the Federal Ministry of Finance has tried to control the size of the consolidated fiscal deficit
According to IPR Fact Sheet, the fiscal deficit target agreed with the IMF was Rs 306 billion for the quarter. This has been exceeded by the relatively small amount of Rs 22 billion and, as such, a performance waiver may not be a problem. How has this containment of the deficit been achieved?
Fact Sheet Reveal that revenues have been below target by Rs 16 billion. Also, consolidated expenditure is only Rs 6 billion above the target in the Program with IMF. Tax revenues have fallen short by Rs 32 billion, primarily of the FBR. Non-tax revenues are somewhat larger, due to a big CSF inflow. The success in managing expenditure is to be found partly in the policy of withholding releases. Defence expenditure was expected to rise by 12% in 2015-16, especially in the presence of Zarb-e-Azb operations. But in the first quarter there is actually a decline of Rs 19 billion or 11%. This has led to saving of Rs 39 billion. It is unlikely, however, that this cut will be permanent in character.
Further, releases to the provincial governments have also been withheld partially. Based on the revenues in the divisible pool and straight transfers, the total amount to be sent to the provinces during the quarter was Rs 367 billion. Instead, the transfer has been restricted to Rs 289 billion, a large shortfall of Rs 78 billion. The provinces have consequently been constrained in spending and have incurred a combined deficit of Rs 29 billion. This is sharp contrast to the expectation that the provinces will be in surplus to the extent of Rs 297 billion in 2015-16.Therefore, it appears that the federal government has given up on trying to restrain expenditure by provincial governments. It has found it expedient to hold back transfers towards the end of the quarter and thereby restrict expenditure. But can this practice be sustained over the year? 'This could become a matter for the Council of Common Interests.
Overall, if transfers to the defence establishment and the provincial governments had not been restricted, the fiscal deficit for the quarter could have been higher by as much as Rs 117 billion. Instead of a deficit of 1.1% of the GDP it would have been 1.5% of the GDP. Based on past experience, the first quarter fiscal deficit is approximately 22% of the annual deficit. On this basis, the projected deficit for 2015-16 may be significantly above the target of 4.3% of the GDP.
According to this IPR Fact Sheet that there is need also to highlight some successes. The revenue growth of 12% in FBR revenue is reasonable in light of the fact that the nominal GDP has grown at about half this rate. The problem lies more in the lack of realism of the annual revenue target growth of almost 20%. Income tax revenues have performed particularly well with a growth rate of over 26%. Sales tax revenues have declined somewhat in the presence of low oil and other prices, along with higher refunds. Provincial governments deserve a special commendation for the over 32% growth in own-tax revenues, especially by the Government of Sindh.
The other positive feature is the sharp growth in PSDP spending of 57%, especially at the federal level. However, the expenditure is still 47% only of the releases to the Planning Commission up to the end of September 2015. There appears to be a growing problem of underutilization of funds by Ministries/ Divisions and autonomous organisations in implementation of projects.
The Fact Sheet highlighted two other problems need to be highlighted. First, markup payments on debt continue to show growth of over 5%, despite the sharp fall in interest rates. This is due to the 'lock-in' effect of sale of PIBs worth Rs 2.8 trillion in the last two years at relatively high rates of return. The federal budget of 2015-16 envisages no growth in cost of debt servicing. But if the trend of the last quarter persists then this will imply additional expenditure of over Rs 65 billion.
Second, the pattern of financing of the deficit is also very different from that in the corresponding quarter of 2014-15. Net external borrowing has increased significantly by Rs 69 billion, partly due to the sale of expensive Euro bonds. Non-banking sources have contributed less, especially because of lower purchase of PIBs by almost Rs 100 billion. This implies that interest rates have probably bottomed out and may need to be raised. Borrowing from the commercial banks has been exceptionally high and the process of 'crowding out' of the private sector from credit continues.
The fact sheet added that overall, the projected deficit for 2015-16 is likely to be significantly larger than 4.3% of the GDP. First, FBR revenues could be below target by almost Rs 150 billion, equivalent to 0.5% of the GDP. Second, the additional cost of the Prime Minister's agriculture relief package of over Rs 100 billion has to be factored in.
Third, as highlighted above, debt serving could also be significantly higher. Fourth, expenditures may catch up as more releases take place. Despite draconian cuts in the size of the PSDP there is likelihood that the fiscal deficit could approach or exceed last year's level of 5.3% of GDP. This is the case even in the absence of any payments for retirement of the large and growing circular debt of the power sector of over 2% of the GDP.-PR
Comments
Comments are closed.