Uncertain budgetary outcome in 2023-24

The outcome numbers on the fiscal operations for the first three quarters of 2023-24 have been released recently by the Federal Ministry of Finance.

The annual budget deficit agreed with the IMF under the Stand-by Facility is 7.7 percentage of the GDP for 2023-24. Given the extremely high interest rates and reliance pre-dominantly on domestic borrowing, the expectation is that the outlay on debt servicing will rise to the peak level of 8.1 percentage of the GDP. Consequently, there will be a primary surplus of 0.4 percentage of the GDP.

These targets represent the same budget deficit of 7.7 percentage of the GDP as in 2022-23, but a big improvement from the primary deficit of 1 percentage of the GDP. This is perhaps surprising that even under the coverage of an operational Programme, the IMF was willing to accept an unchanged level of the budget deficit.

However, given the likely extraordinary jump in the level of debt servicing from 6.7 percentage of the GDP in 2022-23 to 8.1 percentage of the GDP in 2023-24, the IMF had opted to focus on the primary surplus/deficit position. The expectation is that there will be a primary surplus of 0.4 percentage of the GDP in 2023-24, as compared to a deficit of 1 percentage of the GDP in 2022-23.

The fundamental question is how the Federal and Provincial Governments have been performing on the fiscal front in the first three quarters of 2023-24; and is there a likelihood that the annual targets will be met?

The first comparison is between the numbers for the first three quarters of 2023-24 and 2022-23. There is some good news. The fiscal deficit is near 3.5 percentage of the GDP in both years. Further, there is a much larger primary surplus this year of 1.5 percentage of the GDP as compared to 0.6 percentage of the GDP in the first three quarters of 2022-23. Therefore, the initial assessment is that the performance on the budgetary front is likely to be better this year and the targets are achievable.

However, an in-depth examination of the numbers in the first three quarters reveals some worrying developments.

The first apparently positive outcome is the unprecedented high growth rate of non-tax revenues of over 90 percentage. This is due to very fast growth in the receipt of State Bank of Pakistan (SBP) profits and in revenues from the petroleum levy.

The SBP profits of Rs 972 billion for the year were all transferred by the end of the second quarter. Due to the big jump in interest income from lending to commercial banks for buying government bonds or treasury bills, the SBP profits have increased by as much as 162 percentage over the level in 2022-23. This has been the main reason for the over 90 percentage growth in Federal non-tax revenues. But there will be no further revenues from this source in 2023-24.

Petroleum levy revenues have also shown extraordinary growth of almost 99 percentage in the first three quarters. But there is a visible flattening out of revenues from this source. It was Rs 250 billion in the second quarter and has fallen to Rs 247 billion in the third quarter. The rise in smuggling of oil from Iran may lead to a further decline in revenues in the fourth quarter.

Turning to the expenditure side at the Federal level, there is evidence of staggering and postponement of expenditures. For example, the annual outlay on subsidies is budgeted to increase by 60 percentage in 2023-24. But believe it or not, the expenditure on this head has actually decreased by 10 percentage in relation to last year’s level in the first two quarters, which alone implies a reduction in the budget deficit by 0.4 percentage of the GDP. This will be wiped out as almost Rs 591 billion is likely to be spent on subsidies in the last quarter.

A similar problem has risen with the delay in spending on grants and development projects. The expenditure on grants is projected to increase by 20 percentage in 2023-24. However, still almost Rs 300 billion of grants remain to be disbursed in the fourth quarter of 2023-24.

There has also been an extraordinary cut in PSDP spending. The actual disbursement of funds to projects is down by 3 percentage in relation to 2022-23 in the first three quarters, although the development budget for the year is 31 percentage higher. This is one part of the budget where this is likely to be a major shortfall in expenditure to control the budget deficit.

The Provincial Governments are also likely to have a big problem in achieving the combined cash surplus target of Rs 650 billion. There is a pronounced seasonality in the position quarterly of this surplus. Last year, the surplus at the end of the third quarter was Rs 456 billion, but it declined sharply to Rs 154 billion by the end of the year. Similarly, the surplus at the end of the third quarter of 2023-24 is Rs 289 billion. Not only is this almost 37 percentage lower than the level last year, but it could fall even further in the fourth quarter.

Overall, we have a somewhat unusual budgetary situation as of the end of the third quarter of 2023-24. A large primary surplus of 1.5 percentage of the GDP has been generated, as compared to 0.4 percentage of the GDP target for the year.

However, there are no grounds for complacency. As highlighted above, there has been a faster inflow of revenues in the first nine months, with an anticipated slowdown in the fourth quarter. Further, there is also evidence of staggering and postponement of expenditures related to subsidies, grants, and development.

These expenditures will be scaled up in the fourth quarter if the build-up of circular debt, large financing problems of SOEs (state-owned enterprises) and shortfalls in relief spending are to be avoided. The final area of concern is the low likelihood of the four Provincial Governments combined achieving the annual cash surplus target.

Overall, as Pakistan starts the process of interaction with an IMF delegation in the second half of May for a new three-year Extended Fund Facility, the budgetary outcome in 2023-24 is likely to be focused on very carefully.

At this stage it is anticipated that in view of the above reasons the budget deficit may be higher by almost 1 percentage of the GDP and reach 8.7 percentage of the GDP. This will imply a primary deficit, rather than a surplus, of 0.6 percentage of the GDP. Consequently, very tough budgetary targets may be set for fiscal stabilisation in 2024-25 in the new IMF Programme.

Copyright Business Recorder, 2024