Our precarious fiscal position

The provisional figures on the fiscal outcome for the year 2007-08, released by the Ministry of Finance, confirm our worst fears that public finances of the country are in a state of crisis. According to the consolidated data on budgetary operations, the overall deficit of the country rose to a record Rs 777.2 billion or 7.4 percent of GDP as against the target of Rs 398 billion or 4.2 percent of GDP set by the previous government for 2007-08.
The deficit was also 106 percent higher than previous year's actual deficit of about Rs 377 billion or 4.3 percent of GDP. In order to finance this massive deficit, the government had to depend on highest-ever bank borrowings of Rs 625 billion against the budgetary target of only Rs 81 billion, showing an excessive recourse to bank borrowings of about 673 percent. During 2006-07, bank borrowings for deficit financing were much lower at Rs 178 billion.
The Federal Government had to restrict development spending under the Public Sector Development Programme (PSDP) to Rs 451 billion against the budgetary allocation of Rs 520 billion in an attempt to partially contain the deficit. A simple explanation of this dismal performance is that the government failed to mobilise adequate resources to meet its sharply rising expenditure requirements.
Although total revenues increased by almost Rs 200 billion to stand at Rs 1.499 trillion in 2007-08, the position was quite discouraging when compared in terms of movement in important relevant ratios.
The most depressing feature was a substantial decline in revenue receipts from 14.9 percent of GDP in 2006-07 to 14.3 percent during 2007-08 while tax revenues and non-tax revenues dropped by 0.2 percentage point and 0.4 percentage point to 10 percent and 4.3 percent of GDP respectively during the year. In contrast, total expenditures during 2007-08 increased substantially to 21.7 percent of GDP as compared with 19.2 percent a year before.
In absolute terms, total expenditures rose by more than Rs 600 billion or 36 percent. Current expenditures showed an increase of Rs 483 billion or 35 percent. Although defence expenditures increased to Rs 286 billion against an allocation of Rs 275 billion, these, however, declined as a percentage of GDP to 2.7 percent from 2.9 percent in 2006-07.
The government earned about Rs 89 billion on account of royalties on oil and gas, discount retained on domestic crude oil production and development surcharge on oil and gas, which included Rs 14.4 billion of petroleum development levy. From the above data, it could be easily concluded that fiscal performance during 2007-08 was probably at its worst.
Not only overall budget deficit at over Rs 777 billion was the highest-ever in the country's history, most of it was financed through bank borrowings, again touching a record level of Rs 625 billion. It was also sad to note that revenue/tax receipts as a percentage of GDP declined during the year which belies the claims of the FBR to have successfully implemented various structural and organisational reforms in order to increase tax revenues.
In fact, fall in tax to GDP ratio is an indicator that tax collectors are not even able to maintain the same level of effort and their efficiency has declined. On the other hand, current expenditures of the government are increasing sharply and development budget has to be axed to contain the overall fiscal deficit.
Another disappointing aspect was that fiscal discipline achieved so painstakingly over the last few years seems to have been frittered away during 2007-08. Overall budget deficit amounting to 7.7 percent of GDP during 1997-98 was brought down to 2.4 percent by 2003-04 but grew steadily to reach 4.3 percent of GDP by 2006-07.
The picture during 2007-08 has sharply aggravated an already negative trend. It also shows that the budget deficit target of 4.7 percent of GDP fixed for 2008-09 is almost impossible to achieve, particularly when no major revenue mobilisation efforts or expenditure cutting measures seem to be contemplated or are in place.
The consequences of this highly negative development are visible in the shape of high inflation rate estimated at about 25 percent, widening of current account deficit, fast depreciation of the rupee and loss of foreign exchange reserves. More distressing is the misery inflicted on the ordinary people due to erosion of the purchasing power of their savings and incomes.
Even basic necessities of life are now getting out of their reach. Monetary measures adopted by the State Bank to curb inflation are also not yielding the desired results due to highly expansionary fiscal strategy of the government.
If the fiscal trend witnessed during 2007-08 is not soon reversed, major macroeconomic indicators of the economy could deteriorate further and the life of ordinary people would become more difficult. In our view, it is time for the government in Islamabad to give serious consideration to the worsening fiscal balance because this is an area which has a pervasive and profound impact on all aspects of the economy.