The Sindh budget 2011-12 was presented in the backdrop of a complex fiscal situation in which the provincial government expected to receive higher revenues along with increased expenditure responsibilities from the federal government.
In the case of revenues, the provincial share of net proceeds of divisible pool taxes increased from 56 percent in 2010-11 to 57.5 percent in 2011-12 under the 7th NFC Award. This gave a boost to federal transfers to provinces, and Sindh is not an exception.
The abolishment of the concurrent list under the 18th Amendment in the constitution devolved greater expenditures responsibilities to the provincial government. Alongside, the province(s) incurred expenditures as a result of the flood in July 2010 not envisaged in budget 2010-11.
The Government of Sindh (GoS) tabled and passed a surplus budget of Rs 882 million, against a large deficit budget at federal level. But is this commendable? This article is an attempt to look at this budget surplus by analysing key budgetary magnitudes.
Sindh's general revenue receipt for 2011-12 has been estimated at Rs 392 billion and current revenue expenditures at Rs 283 billion resulting in a revenue surplus of Rs 109 billion. Current capital receipt and expenditures are estimated at Rs 27 billion and Rs 33 billion respectively, indicating a deficit of Rs 6 billion.
Finally, public account receipts and disbursement amounting Rs 254 billion and Rs 249 billion respectively create a surplus of Rs 5.5 billion. Thus total net provincial contribution or resources equals Rs 108 billion for 2011-12. Outsource financing totalled Rs 30 billion, including development revenue receipt of Rs 9.8 billion, foreign project assistance of Rs 9.5 billion and flood emergency reconstruction project of Rs 10.7 billion. As a result of these estimates, Rs 138 billion, which is the sum of net provincial resources and total outsource financing, constitute total development resources for the running fiscal year.
ERRORS, ERRORS Excluding Rs 141 billion estimated for development expenditures from development resources, the budget deficit amounts to Rs 3 billion. However, in order to convert this deficit into a surplus of Rs 882 million, an amount of Rs 4 billion as financing through cash balance is added. As the term indicates, financing through cash balance is actually not a resource but the borrowing from State Bank, which is used to finance budget deficit in the absence of resources or loans from other sources. Once this accounting error is corrected, the budget surplus turns into deficit.
In addition to this accounting error, the budget document also contains a calculation error, which shows revised estimates of budget deficit for 2010-11 at Rs 13.8 billion. This appears to be underreporting, as according to our estimates, the revised estimate of budget deficit for 2010-11 is Rs 32.2 billion.
This is because the revised estimates of development expenditures are reported at Rs 65.5 billion; however, the computation of development expenditures by adding sub-heads of development expenditures equals Rs 88 billion in 2010-11.
OPTIMISTIC REVENUE ESTIMATIONS In addition to these, a systematic analysis of budget 2011-12 indicates an overestimation of resources and underestimation in expenditures that eventually has reduced the gap between resources and expenditures and converted the budget deficit into surplus.
As for the resource side, there are four major sources of general revenue receipts: (1) Federal Transfers from divisible pool, (2) Straight Transfers, (3) Provincial Tax Revenues and (4) Provincial Non-Tax Revenues. It is under these four heads where revenue receipt target appears unlikely to be achieved and hence the overall revenue target of Rs 458 billion looks overambitious and unrealistic.
The bulk of revenues come under federal transfers. This year, under the IMF pressure, it seems that the federal government overestimated tax revenues. Consequently, federal transfers from divisible pool amounting Rs 251.8 billion to GoS seems an overestimation (see Table 2).
Moreover, in straight transfers that depend on exploration of natural resources like oil and gas, any increase in quantity explored or price would affect the magnitude of these transfers. While in the budget 2011-12, the amount under these transfers is estimated at over Rs 53 billion is difficult to achieve given the decline in natural gas reserves and output.
While these two transfers came from federal government, it is important to analyse the provincial tax and non-tax receipts. Provincial tax revenue shows an increase from Rs 50 billion in 2010-11 to Rs 60 billion in 2011-12 indicating a growth of 20 percent (see Table 2). In line with last year's performance, the revised estimate shows that provincial tax receipts in 2010-11 remained at Rs 50 billion compared to that of budget estimates of Rs 56.5 billion ie a shortfall of more than 11 percent.
Given this, it can be inferred that this 20 percent growth is an overestimation. The analysis of sub-heads of tax revenue indicates that the high growth hinges on expecting high growth in provincial sales tax on services (SToS). It is worth mentioning that revised estimate of SToS remained 31 percent below its target envisaged in budget 2010-11. A target of 44 percent growth in SToS in budget 2011-12 therefore seems optimistic.
Considering all these overestimations, if, for instance, the federal transfers fall short of Rs 25 billion (nearly 10 percent), along with the under-materialisation of provincial tax revenues by Rs 10 billion (Rs 5 billion in provincial SToS and Rs 5 billion in other provincial taxes), the resulting amount of general revenue receipt would likely be Rs 357 billion instead of Rs 392 billion as currently budgeted.
In addition, budget documents show that the revised estimate for 2010-11 of Sindh Growth and Rural Revitalisation Project (SGRRP) is zero, which is a funding from the Asian Development Bank (ADB) and hence a component of current capital receipt. These expenditures, however, were estimated to be at Rs 10.3 billion in budget 2010-11. Sources reveal that the ADB had attached certain conditionalities to be met by the GoS for the disbursement of this amount.
The same sources unveil that the chances to meet these conditions in future are less likely as there is some political opposition within the government circles over these conditions. Thus, the amount of Rs 10.6 billion ($120 million) shown in the budget estimate of 2011-12 is misleading, as it seems less likely that the ADB will disburse the funds. Deducting this amount from the budget estimate of current capital receipt reduce it to Rs 16.4 billion.
EXPENDITURE OVERRUNS Comparison of budgeted and revised estimates of current revenue expenditure shows that it increased from Rs 268 billion to Rs 281 billion in 2010-11. These expenditures are the sum of both provincial and local government's current expenditures.
Detailed analysis of the budget documents indicate that the Sindh government's expenditures include the amount spent on floods that caused an overspending of Rs 20 billion. If this had not happened, the provincial government's current expenditures would have been Rs 137 billion. This is commendable when compared with the current expenditures of Rs 147.5 billion budget estimate for 2010-11.
However, the budget estimates for 2011-12 of Rs 146 billion seems unrealistic given the fact the inflationary trends and the increase of 15 percent announced in the salaries of government employees. Assuming that if Sindh's current expenditures shoot up by 5 percent, which is Rs 7.5 billion extra of additional spending, the current expenditures would go up to Rs 290.6 billion.
The revised figures of general revenue receipt (Rs 357 billion) and current capital receipt (Rs 16.4 billion) imply that there would likely be a shortfall of Rs 45 billion in the revenue receipts of GoS. After incorporating the additional expenditures due to underestimated amount of current expenditure, this shortfall would likely go up to Rs 52.5 billion.
In addition, the adjustment of this amount with the surplus of Rs 882 million gives the deficit of Rs 51.6 billion. Thus, roughly speaking, the GoS budget 2011-12 is a deficit budget of over Rs 50 billion. It can be said that the GoS would likely reallocate the development budget of Rs 141 billion to finance this additional amount. In that case the development budget will then be reduced to Rs 91 billion; which, in turn, would affect the long term prospects of the province.
The writer is Principal Economist at SPDC. She has done M.Phil in Economics (International Trade) from Applied Economics Research Center (AERC), University of Karachi and MSc in Economics from University of Warwick, UK. She can be reached at iffatara@spdc.org.pk
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OVERALL BUDGETARY POSITION OF SINDH GOVERNMENT
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2010-11 2011-12
Rs (bn) BUDGET REVISED BUDGET
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Total General Revenue Receipts (A) 340.2 329.1 392.0
Total Current Revenue Expenditures 268.3 281.2 283.1
Revenue Surplus/Deficit (A) 72.0 47.8 108.8
Current Capital Receipts 26.1 17.6 27.0
Current Capital Expenditures 18.9 20.5 33.3
Net Capital Receipts (B) 7.2 -2.9 -6.3
Public Accounts Receipts 241.1 233.6 254.3
Public Accounts Disbursement 235.9 229.4 248.8
Net Public Accounts Receipts-C 5.2 4.2 5.5
1. Total Provincial Contribution (A+B+C) 84.4 49.2 108.0
Development Revenue Receipts -D 14.8 3.1 9.8
Donor Agencies -E 4.8 3.9 20.2
2. Total Outsource Funding (D+E) 19.5 7.0 29.9
Total Development Resources (1+2) 104.0 56.2 138
Provincial ADP -G 115.0 75.4 111.0
Other Development Expenditures -H 20.1 13.0 30.1
Total Development Expenditures (G+H) 135.1 88.4 141.1
Budget Deficit (-)/Surplus (+) -31.1 -32.2 -3.1
Financing Through Cash 6.0 -4.5 4.0
Net Budget Deficit (-)/Surplus (+) -25.1 -36.7 0.9
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Source: Annual Budget Statement 2011-12, Government of Sindh
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KEY BUDGETARY MAGNITUDES
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2010-11 2011-12
Rs (bn) Budget Revised Budget
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Current Revenue Receipts 340.2 329.1 392.0
Federal Tax Assignment 207.3 199.0 251.9
Straight Transfers 51.2 61.5 53.4
Provincial Sales Tax on Services 25.0 17.4 25.0
Other Provincial Tax Receipts 31.5 32.7 35.0
Provincial Non-Tax Receipts 19.0 12.4 19.9
Others 6.3 6.0 6.8
Current Revenue Expenditure 268.3 281.2 283.1
Provincial Government 147.5 157.1 146.3
Total Local Governments 120.8 124.2 136.9
Current Capital Receipts 26.1 17.6 27.0
Local Repayments/Loans 6.7 3.2 6.9
DPC/SWAP, World Bank 8.1 13.6 8.6
European Commission Grant 0.9 0.8 0.9
ADB Funding (SGRRP) 10.3 0.0 10.6
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Source: Annual Budget Statement & Budget at Glance FY12, Government of Sindh
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