Burgeoning budget deficit

The information on fiscal operations in 2021-22 has just been released by the Ministry of Finance. These figures are based on information from the AGPR (Accountant General of Pakistan Revenue), provincial AGs (accountants general), SBP (State Bank of Pakistan) and EAD (Economic Affairs Division).

The bottom line is an unbelievably large budget deficit of the federal and provincial governments combined of Rs 5260 billion in 2021-22. This is equivalent to 7.9 percent of the recently rebased GDP. With the GDP prior to the rebasing, it is high as 9.8 percent of the GDP. This is probably the highest ever deficit, even larger than the earlier peak deficit of 8.9 percent of the GDP in 2018-19.

The targeted deficit at the time of presentation of the federal budget in June 21 by the finance minister was Rs 3420 billion, equivalent to 5.1 percent of the rebased GDP. The year has ended with the deficit at Rs 5,260 billion, higher by as much as Rs 1,840 billion, implying an increase of as much as 54 percent. Public finances, especially expenditures by the line ministries and the SOEs (State-Owned Enterprises) appear to be increasingly out of control of the Ministry of Finance in Islamabad.

What explains this huge divergence from the budgeted level of the deficit? Almost 40 percent is due to net revenue receipts of the federal government being lower than the budgeted level. 48 percent is the result of higher than budgeted level of expenditure and the remaining 12 percent has been caused by the provincial governments, generating a cash surplus lower than the anticipated level.

Within federal revenues, there is one silver lining in the cloud. This is the level of FBR tax revenues. They have shown a handsome growth of 29 percent. However, this performance has been more than neutralized by the huge shortfall in non-tax revenues of 44 percent in relation to the targeted level. Within non-tax revenues, petroleum levy has yielded much lower revenues than targeted for and SBP profits have also been smaller.

Federal current expenditure has violated all limits and risen by Rs 847 billion over the budgeted level. The level of subsidies is 124 percent above the budgeted level due particularly to huge problems in the power sector arising from the unprecedented hike in fuel costs and in the absence of appropriate tariff adjustments. Further, there was the need to support the petroleum sector after the price reduction by the former PM in February 2022.

Grants have also been higher by 37 percent in relation to the projected level. Contingent liabilities against credit guarantees provided by the federal government have been higher and an effort has been made to accelerate the payment of pending duty drawbacks.

The problem is that at the time of the presentation in June 2022 of the federal budget for 2022-23 the revised estimate was of a consolidated budget deficit of 7.1 percent of the GDP. Now the actual magnitude has turned out to be significantly higher at 7.9 percent of the GDP. The budgeted level of the consolidated deficit for 2022-23 is lower by as much as 3 percent of the GDP at 4.9 percent of the GDP.

The agreement with the IMF (International Monetary Fund) is not only to bring down the consolidated deficit to 4.9 percent of the GDP in 2022-23 but also to generate a primary surplus of Rs 153 billion, equivalent to 0.2 percent of the GDP. The actual position in 2021-22 was a massive primary deficit of 3.1 percent of the GDP. Therefore, an improvement of 3.3 percent of the GDP in the position of the primary surplus is anticipated.

Overall, the budgetary outcome in 2022-23 is expected to represent an improvement in the budget and primary deficits of 3 or more percent of the GDP. This extent of reduction has never been achieved before, even during the tenure of previous IMF programmes.

This is likely to create great uncertainty about the continuation of the IMF programme up to June 2023. A number of mini budgets during the year will still not probably be able to bring about a budget deficit reduction of 3 percent of the GDP, in relation to the previous year’s level.

The federal Ministry of Finance may, therefore, seek an increase in the budget deficit in 2022-23 by the 0.8 percent of the GDP higher deficit in 2021-22. This will raise the targeted level of the deficit next year to 5.7 percent of the GDP, which will still require a reduction in the deficit by 2.2 percent of the GDP. Also, a primary surplus is unlikely to be generated and a deficit of 0.5 percent of the GDP may be negotiated with the IMF.

Finally, there remains one concern about the budgetary outcome in 2021-22. The huge federal deficit of Rs 5,610 billion has been financed to the extent of almost 80 percent by domestic bank borrowing. This has implied higher monetary expansion by over 20 percent, which is bound to increase pressure on the price level in 2022-23. Also, this has probably also been a factor contributing to higher level of imports in 2021-22.

There is need to highlight in conclusion that the extremely formidable task of reducing the budget deficit by 3 percent of the GDP in 2022-23 in relation to the level in 2021-22 will imply a big increase in the level of economic uncertainty about the future of the IMF programme, in the event the quarterly performance criteria, especially related to public finances, are not met. The IMF seems to be in no mood to give waivers unlike its very sympathetic attitude in the previous programme from 2013 to 2016.

Copyright Business Recorder, 2022