Fiscal tricks!

Is it creative accounting, reverse engineering or running numbers in backward direction? Whatever coinage you fancy; the point is that it's no coincidence that consolidated fiscal deficit of Rs1,009 billion is merely Rs3 billion lower than IMF's binding target of Rs1,012 billion set for 9MFY16.

But it's a myth that statistical discrepancies in expenditures are used to tame fiscal deficit; Finance Minister Ishaq Dar is too smart for it! The deficit is calculated by financing side and in simple words net financing is net deficit. The revenue numbers are known, and so is the deficit by using simple math to infer quarterly expenditure. The main items of expenditure are already known and a few are estimates; the difference between revenue and deficit and known expenditure items are statistical discrepancies.

Nonetheless, discrepancies as high as Rs138 billion are too high for a quarter. The details are likely to unveil in the full-year number. But that is not the point; it is actually careful accounting treatments, window dressing and lowering disbursements of development expenditures as some of the tools that are being consistently deployed to meet the quarterly quantitative targets of IMF. And it's foolish to assume that the MoF is making fool of the IMF; rather the fund is keeping a deliberate silence on misappropriations.

Four out of five quantitative targets are met by some manipulation and maneuvering, which in essence defies the very purpose of those targets. The floor of net international reserves are met by short term borrowing from international banks to show the right number on the last day of any quarter and it adversely changes soon after by retiring the borrowings. Isn't it window dressing?

Ceiling on net domestic assets of the SBP are met by making cash reserve requirement at zero for a few local commercial banks for last days of any quarter to let them lower their OMO holding and the positions are normalized right after. Isn't it creative accounting?

Similarly, the ceiling on net government budgetary borrowing from the SBP is met by consistent rolling of OMO injection over trillion rupees. Isn't this defying the purpose of check on effective inflationary money creation?

The fourth target is ceiling on overall budget deficit which is almost perfectly met in 9MFY16. The payments of circular debt are withheld, the PSDP allocation in third quarter is painfully slow, and higher-than-expected surplus from Sindh government is doing the trick.

It would be unfair to not give FBR its due credit - tax revenues grew by 19 percent in 9MFY16 and tax-to-GDP ratio in 9MFY16 increased up to 7.7 percent from 7.1 percent in the corresponding period last year. But the break-up of tax collection is not showing an encouraging picture. Thanks to the imposition of super tax and higher minimum taxes on income, direct tax to GDP inched up to 2.7 percent from 2.6 percent in 9MFY16.

However, in the third quarter the progress is rather slow as the ratio declined from 0.89 percent in 3QFY15 to 0.85 percent in 3QFY16. That shows that perhaps economic growth has slowed. Nonetheless, thanks to mini budget, indirect tax measures and higher sales tax collection on POL products improved the overall number.

Meanwhile, higher taxation growth is undermined by low non-tax revenues, as there aren't any proceeds from transactions like HBL privatization to jack up SBPs' profits this year; nor are there many inflows from the CSF. Non-tax revenues in 9MFY16 declined to 2.3 percent from 2.8 percent in the corresponding period last year.

The big question however is whether economic slowdown can be partly attributed to low PSDP allocation? It is probably kept low to meet the IMF's target. The growth in consolidated development expenditure eased to 7 percent in the third quarter as compared to 40 percent in the first half. Apart from low PSDP allocation, poor cotton crop explains the downward revision of nominal GDP projection for FY16 from Rs30.6 trillion in Dec-15 to Rs29.8 trillion in Mar-16. However, the nominal growth of 8.9 percent is still seemingly too high as adjusted for 2.8 percent inflation; it is depicting real growth of 5.9 percent. But the consensus forecast is at 4.5 percent for FY16, which implies that nominal GDP would revise down further in June.

On the current expenditure side, interest expense is inching up despite falling interest rates. That is probably due to irrational decision of moving towards long term high cost fixed rate PIBs from short term floating T-Bills just before the downward cycle of interest rates started.

Incorporating everything including new taxation measures, low non-tax revenues and restricted PSDP allocation, the consolidated fiscal deficit of 1.7 percent in 3QFY16 is the highest in the past seven quarters. Nonetheless, 3.4 percent in 9MFY16 is a comfortable number; but meeting 4.3 percent in full year is a daunting task as non-tax revenues will keep portraying a sorry picture. The telecom spectrum auction and privatization receipts are most likely to remain zero by year end; and the government may continue to keep a check on PSDP allocation, and may jack up tax revenues by holding refunds and collecting advance taxes.

One way or the other, Dar and team would strive hard to not let the fiscal deficit slip much and will end the IMF programme with flying colours by meeting almost all the quantitative targets. The latest move of declining interest rates by 0.25 percent when inflationary expectations are starting to build up. What kind of monetary policy is this? Perhaps to lower interest cost of government domestic debt to tame deficit.