First quarter fiscal report card is out. The consolidated fiscal deficit stood at Rs484 billion (1.1% of GDP) in Jul-Sep 20 as compared to Rs286 billion (0.7% of GDP) in the same period last year. The overall fiscal revenues are down by 1 percent while the expenditures are up by 15 percent. The slippage are due to higher debt servicing (30% increase), other current (less of defense and debt), expenditure (up by 10%) and 46 percent increase in development expenditure.
The higher deficit is due to increase in government spending on Covid related relief package, lower taxation growth due to economic slowdown, and higher debt servicing despite the fact that interest rates are almost halved. This is due to issuance of long-term debt (PIBs) at peaking rates. Even one-year papers are still carrying high rates. In subsequent quarters, debt servicing will come down. Moreover, the currency appreciation in the second quarter would dilute the external debt servicing too. The good news is that the primary fiscal balance remained in the surplus – at 0.57 percent of GDP verses 0.68 percent in the same period last year.
FBR tax revenues are up by 5 percent to Rs1,011 billion. Direct taxes are up by 2 percent while the sales tax growth is standing at 8 percent. Custom duties collection remained flat as there is case of rationalization of duties as this is negating the impact of growth in imports in Pak Rupee by 7 percent in the 1Q. FED is up by 14 percent to partially compensate flattish custom duties.
The real gain made by federal government is in petroleum levy – up by 110 percent to Rs137 billion. Low oil prices have given the cushion to the government to fully utilize the PL. If oil prices remain low, this will not help in curtailing the current account deficit but would help in taming the fiscal deficit. In FY16, the international oil prices averaged at $43/barrel and the fiscal deficit was at the minimum level of decade at 4.6 percent of GDP and current account deficit stood at 1.8 percent of GDP. Once again, oil prices averaged at $43/barrel in the last quarter.
The federal government’s non-tax revenues are down by 41 percent to Rs189 billion. Party spoilers are decline in PTA profits (down by 89%) and SBP profits (down by 43%). PTA profits were high due to one-off auction selling last year, and SBP profits ought to normalize due to slow shift of floater stocks to banks and absence of very high exchange gains.
Transfer to provinces are down by 18 percent as the gain from PL is not part of the divisible pool and all that additional amount is going to the federal government. Total fiscal expenditure is up by 11 percent to Rs1,963 billion. The federal fiscal expenditure is up by 16 percent to Rs1,378 billion. The increase is primarily in the current expenditure – up by 16 percent to Rs1,271 billion.
Debt servicing is up by 30 percent to Rs742 billion (domestic debt servicing up by 39% to Rs685bn) as the adjustment of interest rates would take time to show the impact. Defence expenditure is down by 7 percent to Rs224 billion. Surprisingly, pension expenditure for the federal government and defence is down by 13 percent to Rs87 billion. Still, the number is too high and even higher number is for provinces. Having funded pensions for government employees cannot be overemphasized.
The consolidated development expenditure is up by 46 percent to Rs215 billion. Nonetheless, this growth is on a very low base of last year. The number must grow; but for that to happen, fiscal space is required to be created by enhancement in revenues.
The overall fiscal deficit increased by 69 percent to Rs484 billion and the federal fiscal deficit stood at Rs529 billion (up by 20 percent). The gap is being filled by the provincial surplus where two provinces (Punjab and Balochistan) are showing surplus while the rest of two registered a deficit in the first quarter.
The financing is increasingly tilted towards the domestic banking sources as external financing is almost flat (down by 3% to Rs161 bn). Domestic non-bank financing is down by 62 percent to Rs92 billion. The is primarily due to drying out NSS flows as now the institutions are not allowed to invest in NSS and the low rates have kept retail investors at bay. Financing from domestic banking sources is significantly up. This is taking space of the private credit and resulting in higher increase in money supply. Sooner or later this would create demand side inflationary pressures unless the deficit is curbed.
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