Fiscal accounts are expanding; the growth in expenditure, especially development was expected as election approaches. The 20 percent plus jump in tax revenues is heartening to see. The overall deficit stood at 1.2 percent of GDP in 1QFY18, eluding any chances of achieving 4.1 percent target for the full year.
The tax revenues growth is impressive as federal tax revenues grew by 22 percent in the1QFY18; a rare occasion of surpassing budgeted target. The LSM grew by 8.36 percent in 1QFY18, and full year GDP may surpass the target of 6 percent. Given this reality, at the current tax base, the collection ought to grow. The tentative numbers of FBR for 5 months are showing continuation of trend in the first quarter.
Direct tax grew by 24 percent which is implying that businesses are making good money to pay more taxes; well there is no evidence at this point on the expansion of tax base but this should be the case as collection is clearly over nominal GDP growth. Sales tax growth is at an impressive 20 percent, which is due to a combination of higher domestic goods consumption and higher imports.
The provincial taxes have shown an even more impressive growth, though it’s on a much smaller base. The tax collection increased by 35 percent and within it, GST on services took the lead with 54 percent. However, the GST on services (provincial subject) is a small fraction of GST on goods, leaving much room in services sales tax expansion.
Highest growth is seen in custom duties which are up by 27 percent in 1QFY18 as imports growth seems to be the biggest contributor to increase in taxes. The petroleum levy is up by 24 percent, resonating with higher consumption of transportation fuel. This federal subject is not even the part of provincial share in federal taxes and there is much more room for it to grow as oil prices are not high and Pakistan has kept consumer prices lower to similar economies. BR Research has been advocating to increase the PL to not only increase the federal share in revenues but also to discourage imported demand.
There is not much to jubilate on non-tax revenues which are down by 10 percent. The silver lining is the recent passage of CSF reimbursement by US congress; this may result in some inflows in the remaining quarters of this fiscal year to improve the non-tax collection.
The total consolidated expenditure increased by 13 percent while the federal government spending increased by 15 percent. In term of current expenditure, prudence and discipline is missed across the board; provinces slacked more as their spending jumped by 26 percent versus 12 percent increase in federal counterpart. The story of development is exact opposite, where federal government is on a spending spree as federal PSDP jumped by 57 percent, as compared to decline of provincial PSDP by 7 percent - overall PSDP increased by 17 percent.
The overall performance of provincial governments is not bad seeing from the federal lens as they recorded a budget surplus of Rs52 billion against the deficit of Rs163 billion in 4QFY17. However, usually provinces don’t spend much on development in the start of year as in the corresponding period last year, provincial government showed a surplus of Rs80 billion. So keep your fingers crossed for higher development spending down the year by federating units.
The consolidated budget balance stood at Rs441 billion or 1.2 percent of GDP versus Rs438 billion or 1.4 percent of GDP in the corresponding period last year. The net financing has virtually solely remained on domestic banking sources (Rs408bn; up by 36%). In case of foreign financing the gross amount stood at Rs150 billion but virtually all (Rs142bn) is being repaid.
This is not an encouraging trend as relying mainly on domestic banking sources can hamper private sector credit growth. With $2.5 billion raised from international bonds recently, the financing equation can change in the second quarter.
The challenge, ministry of finance would have for the remaining year is to continue the tax revenue growth at handsome pace, and keep provinces showing budgeted surplus. The former can be achieved while the latter ought to slip knowing the province to spend more close to elections given they have high cash surpluses in kitty. Hence, fiscal deficit ought to slip from the targeted 4.1 percent for FY18.
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