Fiscal outcome in first quarter

The first quarter of 2024-25 has closed with an unusual and extremely positive outcome. There is actually a budgetary surplus of Rs1,537 billion. This is attributable to the receipt of Rs2,500 billion as the profits of the SBP (State Bank of Pakistan). However, there will be no further transfer in 2024-25 by the SBP.

There is a need to exclude this transfer if a comparison is to be made with the performance in the first quarter of 2023-24. The result is that the federal budget deficit, excluding the once-and-for-all SBP transfer, is Rs963 billion. This is still better than the deficit in the first quarter of 2023-24 of Rs1,031 billion, when there was no transfer of profits by the SBP. As such, the performance of the federal Ministry of Finance must be commended.

What factors have contributed to the better performance? First, FBR revenues have shown a moderately high growth rate of 25.5%, although the targeted annual growth rate is close to 39%.

Second, for inexplicable reasons, the expenditure on debt servicing has come down by 5.3%, whereas the expectation is that in the whole of 2024-25 it will increase by almost 20%. This alone has contribution to the reduction in federal current expenditure by almost Rs350 billion.

Third, federal development expenditure has also been severely cutback in the first quarter. Only Rs38 billion has been incurred on projects. This is not even 3% of the annual budgeted outlay of Rs 1,400 billion. Overall, it is likely that the federal budget deficit will be substantially higher in subsequent quarters, especially since there will be no further receipt of SBP profits.

Turning to the provincial governments, their combined budgetary performance has been better than in the corresponding period of 2023-24. The overall provincial cash surplus is Rs160 billion, which is better than the surplus in the first quarter of 2023-24 of only Rs51 billion.

However, this largely attributable to a 43.8% increase in federal transfers. Provincial tax revenues have shown only moderate growth of 21.7%. Further, the surplus has been reduced by unaccounted for expenditure in the form of statistical discrepancy of Rs284 billion. This is as much as 136.6% above the level in the first quarter of 2023-24.

Overall, due to the large lump sum SBP transfers, the consolidated budgetary position of the federal and provincial governments is a budget surplus of Rs1,696 billion, equivalent to 1.3% of the GDP. With exclusion of the SBP transfer, there is a deficit of Rs804 billion, equivalent to 0.7% of the GDP. Similarly, exclusion of the SBP transfer changes the primary balance from 2.8% of the GDP to 0.8% of the GDP.

The fundamental question is whether the very positive budgetary outcome in the first quarter of 2024-25 has facilitated the achievement of the fiscal quantitative performance criteria and indicative targets for this quarter in the IMF Programme.

The first quantitative performance criterion is on the primary balance of the consolidated budgets of the federal and provincial budgets. This was set at Rs198 billion for the first quarter. It is actually substantially higher because of the SBP profits. However, even without this big transfer, there would have been a primary surplus of Rs502 billion. Therefore, this represents a good budgetary performance.

The second quantitative performance criterion relates to the amount of government guarantees issued. This was to be limited to Rs515 billion in the first quarter of 2024-25. This information has not been released by the federal ministry of finance. However, the interest payments on guaranteed debt are reported as contingent liabilities in grants. Payment of grants as a whole has shown a big increase of 33.4% in the first quarter. Therefore, it is possible that there has been a relatively big increase in government guaranteed debt.

The third quantitative performance criterion is on the level of cash transfers in the BISP. This was expected to be Rs101 billion in the first quarter and rise cumulatively to almost Rs600 billion by the end of 2024-25. There is not enough disaggregation in the budgetary magnitudes to be able to assess the performance against this criterion.

The fourth performance criterion relates to the number of new tax returns from new filers. There are indications from press releases by the FBR that by the end of September 2024 the target had been greatly exceeded.

Turning to the indicative targets, the first such target relates to the weighted average time to maturity of the local currency domestic debt securities. It is expected to be raised from 2.7 years at end-June 2024 to 2.8 years by end-September 2024. However, there are indications from the market that the government is opting for shorter term treasury bills with the expectation that interest rates will follow a downward path.

The second indicative target is on the level of government health and education expenditure. However, here again an adequate break-up of expenditure is not available to determine the level of such expenditure.

This brings us to the third indicative target of some importance, relating to the size of the provincial cash surplus. It is targeted at Rs1,217 billion for the full year and at Rs342 billion in the first quarter. However, this target has not been met. As highlighted above, the cash surplus was less than half at Rs160 billion. This is primarily due to a cash deficit in the case of the government of Punjab of Rs160 billion.

The fourth indicative target is a crucial target. It relates to FBR revenues. The target was Rs2,652 billion in the first quarter and there is a shortfall of Rs89 billion. There is a risk that the shortfall could increase in coming quarters. The growth rate in the first quarter was 25.5%. This will have to increase to 45% in coming quarters of 2024-25.

FBR will continue to have problems in meeting the indirect tax revenue targets, due to the slow growth in imports and in industrial output. The rupee value of imports has increased by only 5.7% in the first quarter, while the Quantum Index of Manufacturing (QIM) has actually fallen by 0.2% in the first two months of 2024-25.

The first indications are also that the indicative target of revenue of Rs10 billion from the Tajir Dost Scheme has also not been met.

Overall, the fiscal performance in the first quarter of 2024-25 has been substantially improved by the large transfer of Rs2,500 billion of profits by the SBP. This has shrouded the shortfall in FBR revenues and failure of the provincial governments to achieve the required cash surplus.

Debt servicing is likely to rise sharply in coming quarters. Achieving a reduction in the budget deficit from 6.8% of the GDP in 2023-24 to 5.8% of the GDP in 2024-25 will remain a big challenge. Sooner or later, a large mini-budget of taxation proposals may be required to facilitate the achievement of the FBR revenue target and sustain the momentum in the IMF Programme.

Copyright Business Recorder, 2024