Fiscal Summary

Combined fiscal deficit of 1.62 percent during the first quarter casts serious doubts on whether the government will be able to achieve its full year, post-flood, revised target of 4.7 percent even if it is able to implement RGST and the one time flood tax. It may hover around 6 percent in the absence of additional taxes. However, it would reduce to 5.7 percent if Islamabad is able to raise Rs50 billion through RGST and flood tax.
Fiscal performance remained visibly poor during the Jul-Sep period, especially on the revenue side while over-expenditure remained in control, albeit, due to sizable slashes in development expenditure.
Overall revenues were 6 percent lower than the corresponding period last year. Tax revenues exhibited a marginal growth of 6 percent but in real terms it showed a decline - tax-to-GDP ratio declined by 13 basis points versus the same period last year. This is not at all acceptable at a time when all the local and foreign voices are converging on increasing the abysmally low tax collection.
Non-tax revenues reduced by a third as compared to the first quarter last year on account of lower profits being transferred from the State Bank and virtually no dividends earned from the governments fully or partially owned companies. There was a debate on the SBP profits transfer between MoF and the central bank at the time of budget announcement, the former was asking for Rs230 billion while the latter agreed upon Rs150 billion for the full year.
In accordance with the budgeted amount SBP transferred Rs40 billion to the government during the first quarter, although it might be much lower than the central banks actual profits and the government may pressurize SBP near the years end to transfer more money in a bid to tame the deficit.
The devil of circular debt is eating the dividend income of government to be earned through up and down-stream oil and gas companies. Although there might be timing reasons for dividends not to be disbursed in the period under question - like OGDCs final dividend for FY10 due to a late AGM is going to be accounted in Oct-Dec 10 -, dividend income of mere Rs0.5 billion (Rs19 billion Jul-Sep 09) is a point of concern for the fiscal managers.
The six percent hike in current expenditure barring debt serving and defence expenditure is against the promise of the finance minster to freeze it. Its hard to compute the exact quantum of slippage in the absence of detailed data of additional salary expense; nonetheless, the slippage is ever present.
Expenditures on economic affairs were almost thrice compared to the first quarter last year which according to sources in the finance ministry is primarily due to the higher subsidies in power sector, no thanks to the circular debt.
Shortfall in revenues and higher expenditure on power sector services and some slippages in current expenditure fell on the shoulder of development which was slashed to half. Sources close to finmin affirmed that this practice may continue for the remaining year. "The projects slashed are higher than the amount as few projects money is diverted to rehabilitation and reconstruction of flood affected areas and people", sources added.
To add to the misery, in the absence of adequate foreign funding, deficit financing burden is substantially tilted towards the domestic banking sources which is not only inflationary but also crowds out whatever appetite the private sector has left. Barring one time flood funding of $450 million (Rs38 bn) by the IMF, foreign deficit financing was a mere Rs43 billion (Rs114 bn 1Q FY10).