Budgetary slips

The tall claims of macroeconomic indicators published in budget documents and economic survey are seen with suspicion by various independent economists and analysts alike. The economic growth rate of 4.7 percent is challenged by an economic think tank by a wide margin. This column will come up with a detailed analysis soon to find out what is the right growth number - 4.7 or 3.1 percent - or perhaps somewhere in the middle.

The tendency to overstate GDP growth and practices of toying around with accounting treatments to meet targets is characteristic of Ishaq Dar's regime. For instance, when this government attempted to announce GDP number on quarterly basis in FY14; it overstated the number at 5 percent while the actual number was close to 3 percent (See: BR Research column, A deeper dive in GDP ocean, December 16, 2013).

In the case of meeting IMF quantitative targets, the usual practice is to window dress at the last moment to meet the targets. Four out of five quantitative targets are usually met by some manipulation and manoeuvring, which in essence defies the very purpose of those targets (For details read BR Research column: Fiscal Tricks published on May 23, 2016).

Similarly, the revised fiscal deficit of 4.3 percent in FY16 could have some elements of creative accounting in it. For instance, the budget surplus by provinces is estimated at Rs337 billion against 9MFY16 surplus of Rs107 billion. How can the difference of Rs200 billion (0.7% t of GDP) be bridged in the last quarter? Probably by releasing the last quarters provincial shares in the very last week of the fiscal year so that provinces would not have time to spend and eventually they would show surplus.

That is the story of outgoing year. There are serious doubts on meeting deficit target of 3.8 percent in FY17. Without digging in details, intuitively the spending usually accelerates in periods close to election and that may happen in FY17 and FY18. During the Musharraf regime the fiscal deficit averaged at 5.7 percent in FY07-08 period as compared to 3.7 percent in FY02-06, and the average deficit was 7.5 percent in the last two years (FY12-13) of PPP regime versus 6 percent in the governments first three years (FY09-12).

One may wonder how the deficit will reduce to an average of 3.7 percent in FY17-18 from an average of 5.0 percent in FY14-16. Its counterintuitive to run austerity measures close to elections, especially when the country is successfully graduating from an IMF programme.

While seeing the numbers, the task of 17 percent growth in FBR numbers from high a base after achieving 19 percent growth in FY16 is a daunting task especially when there is an array of relaxation in various sectors and the government is running populist measures of not passing the impact of high oil prices on consumers.

The provincial surplus budgeted at Rs339 billion (1.0% of GDP) is too high as provinces may start jacking up development spending as well in upcoming year. There are elements of non-tax revenues - such as Rs50 billion from privatization and Rs75 billion from 3G licenses in FY17. But these may remain elusive. In case of former, no government would take unpopular privatization close to elections and that too in the absence of IMFs stick or carrot. As for 3G licenses, after Telenor acquired 10MHZ 3G license at the tail end of this year, no party is interested in that spectrum anymore. Collectively, these two elements would slip the fiscal deficit by 0.4 percent of GDP.

In case of expenditure, a meager 3 percent growth in mark-up payment during FY17 is not realistic as interest rates may jump up, revenues may remain lower and PSDP spending may be higher than what is targeted. Similarly, the subsidies target of Rs141 billion is too low, given the oil prices are edging north to make circular debt uglier, and due to generous packages announced for agriculture and exporting sectors.

In a nutshell, the fiscal deficit target of 3.8 percent is too optimistic and is probably far from reality. Plausibly what Dar has in mind is to show a balanced budget to IMF to get the clean chit and exit the programme with grace after pocketing the last tranches. And post-September, the spending gear may be changed!