Nothing is going right. The fiscal deficit stood at 5 percent of GDP in 9MFY19 - highest ever deficit since Pakistan started publishing quarterly data. Not to mention, this is the highest 3Q deficit at 2.3 percent of GDP as well- lower tax and non-tax revenues, higher debt servicing, and above the line energy subsidies are the reason for ballooning deficit.
Nothing to cherish about the tax revenues which grew by mere 3 percent in 9MFY19 to Rs3,162 billion; in terms of GDP, tax revenue declined from 8.9 percent to 8.2 percent. The decline is attributed to low income tax, absence of indirect taxes on mobile cards, and general economic slowdown.
Custom duties are the star performer with 18 percent growth as despite import compression;currency devaluation increased the revenue of import duties. Nonetheless, in the similar period last year, custom revenues increased by 25 percent as imports growth was much higher, and this year targets were based on last year's achievements.
The biggest hit in terms of lost opportunity is due to muted growth in sales tax which has remained unchanged in 9MFY19. In the same period last year, the GST was up 17 percent, and that tells the story of low tax collection, as GST on goods is almost one third of total tax collection. In FY18, 55 percent of GST was collected at imported stage - this is largely compensated by currency depreciation, depicting that domestic level GST could have actually declined.
Direct tax collection dipped by 1 percent in 9MFY19, thanks to Miftah’s gift of low taxes to individuals, and reduction in corporate income tax. The benefit accrued by salaried class due to low taxes is recovering from the whole nation in the form of inflation tax through currency depreciation and interest rates spike.
The same argument goes to those people who do not pay their direct taxes or sales tax on the goods or services they supply. The whole nation has to take the pain of tax evaders. It's a classic of free rider ship where businesses enjoy higher return, and consumers pay inflation tax in future.
The performance of non-tax revenues remained dismal in PTI government as they lacked innovation and previous FM was averse to privatization. Nontax revenues declined by 17 percent to Rs422 billion in 9MFY19. Circular debt is chocking the dividend paying capacity of profit-making PSEs while SBP’s profit transfersare shrinking as well.Next year some proceeds from auctions of spectrum and land, and privatization of a few entities may jack up this head.
On the expenditure side, the worries are even more profound. The overall expenditure increased by 9 percent to Rs5.5 trillion despite 32 percent cut in the development expenditure to Rs684 billion. The current expenditure increased by massive 17.7 percent to Rs4.8 trillion in a year when fiscal austerity, and saving in symbolic expenditure was promised by the incumbents.
The elephant in the room is the domestic debt servicing which increased by 19 percent to Rs1.28 trillion. Every quarter, with higher interest rates and more debt accumulation to service the existing debt, the burden is increasing - it grew by 33 percent in 3QFY19 on yearly basis. Going forward with further monetary tightening, debt servicing is going to be a bigger problem.
There is no stoppage to defense expenditure growth - it is up by 24 percent in 9MFY19 - highest nine-month increase since 2011. Last quarter, the country was in high alert along the Indian border, leading to a quarterly growth of 28 percent.
All this has pushed fiscal deficit to historic highs. The IMF wants this to be reduced.The fund is not looking at debt servicing and it would increase interest rates without any fiscal consideration as the target is to reduce the primary deficit to 0.6 percent of GDP. The primary deficit stood at 1.2 percent in 9MFY19 and it was 2.2 percent of GDP in FY18. Tightening up your seat belts!
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