Fiscal report card

The consolidated deficit stood at 3.7 percent of GDP in 9MFY17 versus 3.8 percent target for the full year. The MoF is acknowledging the slippage and has internally revised the target to 4.1 percent of GDP. Yet, the revised numbers are near impossible to achieve and the full year deficit may even cross the IMF’s estimate of 4.5 percent of GDP.

Deficit in 3QFY17 stood at 1.3 percent versus 1.1 percent in the previous quarter and 1.7 percent in the third quarter last year. In 9MFY16, the consolidated deficit was 3.4 percent of GDP and with 1.1 percent in the last quarter; the full year deficit was 4.5 percent in FY16. If the government limits deficit in the 4QFY17 to last year’s level, the FY17 fiscal slippage would still reach 4.8 percent - a deviation of 1 percentage point or Rs335 billion from the target.

The sluggish performance of revenues (6% growth) in 9MFY17 is primarily responsible for high deficit as despite the fact that elections are approaching, the expenditure growth (10%) is not out of the bound. The FBR report card is in red in the third quarter as the tax authority’s revenues fell by 6 percent on quarterly basis to Rs793 billion, leaving a gap of Rs1361 billion (4.1% of GDP) to fill in the last quarter.

The draconian culture within the FBR persists but still the targets are little too stiff for the last quarter. The problem is more pronounced in direct taxes, which stood at Rs892 billion and the FBR has to collect Rs666 billion (2% of GDP) billion in just three months to reach the target - only the devilish spell of ‘666’ can do so. Even to reach last year’s level of collection, the FBR has to fetch Rs432 billion which can be a remote possibility as collection is usually high in last quarter. Anyways, businesses shall be ready for plethora of notices as the FBR desperation is written all over.

It is harsh to blame it all on the FBR as targets were a little too stiff to begin with - 30 percent growth in direct taxes was never happening. In case of indirect taxes, the FBR has collected Rs1,368 billion in three quarters against the full year target of Rs2,063 billion.

The GST collection at Rs898 billion remained same as it was in the corresponding period last year, and it may miss the full year target by around Rs150-200 billion (0.6% of GDP). The only good performer within the tax ambit is custom duties, as any tax on imports ought to spur at home. The collection is up by 14 percent in 9MFY17 and may surpass full year target of Rs143 billion. The FED may miss its target of Rs213 billion as it stands at Rs127 billion in 9MFY17. In case of tobacco, the excise duty backfired as it has spurred smuggling and informality within domestic market which is partially compensated by higher collection on cements.

Petroleum levy is doing fine as higher consumption and upward movement in prices have reaped fruits. Collection in three quarters stood at Rs119 billion and the collection would be higher than full year target of Rs150 billion. The problem is with the GIDC collection, which is just one fifth of target and the shortage could be 0.2-0.3 percent of GDP.

The elephant in the room is non-tax revenues which are recorded at Rs402 billion, mere two fifth of the target in three fourth of the year. The fall is broad based and is more visible in dividend income (down by 38%) and mark-up from PSEs (down by 64%), That said, in the fourth quarter last year, the bulk of interest income and dividends were earned and same could be expected this year; yet the targets will be missed. The story of SBP profits is no different - Rs145 billion earned in nine months versus Rs280 billion targeted.

CSF money came in third quarter to offer some respite, more is expected to arrive in June; the target of RS170 billion is likely to be missed by Rs50-60 billion (0.15% of GDP). The government is expecting last 3G/4G license to be sold as Ufone might be interested. With all the hopes of generating non-tax revenues, the targets will be missed by at least 1-1.2 percent of GDP and combining the tax revenues shortage, the gap would widen to 1.8-2 percent of GDP.

How much expenditure can be curtailed? The current expenditure would not deviate by more than 0.2 percent of GDP from the target of Rs3.3 trillion (10.3% of GDP). The catch is in development spending - so far PSDP is compromised. Allocations so far are at two fifth of budgeted at federal level, while provinces have utilized half their budgets.

Federal deficit stood at 4.1 percent of GDP against full year target of 4.8 percent. Seeing the possible gap of around 1.8 percent in revenues, development expenditure may be cut by 0.5-0.7 percent of GDP; and the federal deficit may overrun by around 1 percent to 5.6 percent of GDP.

The consolidated deficit is at 3.7 percent of GDP as provinces have shown 0.4 percent of surplus in 9MFY17, the target is of another 0.6 percent of GDP surplus alone in last quarter which is highly unlikely as provinces may not compromise development expenditure so close to elections.

Assuming the provinces comply, the consolidated deficit in the best possible scenario would be 4.6 percent of GDP – missing the revised target by half a percentage point. Not that good, Dar!