H1 fiscal year 2014: fiscal deficit fell to four-year low

Fiscal deficit fell to a four-year low of 2.1 percent during the first half of this fiscal year (FY14). According to SBP''s Second Quarterly Report for FY14 on the State of Economy, this was lower than the average deficit in the preceding four years as 4 year average of fiscal deficit stood 2.6 percent of GDP. More encouragingly, this was the first time after four years that primary balance turned to a surplus in the first half of a year, it added.
The fiscal deficit during H1-FY14 is also lower than the same period of last fiscal year, in which it was 2.7 percent. In absolute terms, fiscal deficit narrowed to Rs 540.1 billion in H1-FY14, compared to Rs 624.7 billion in H1-FY13, the report said. This improvement was on account of a slowdown in expenditures and an increase in revenues. Worryingly, development expenditures fell sharply during H1-FY14, declining by 10.5 percent YoY against an increase of 19.5 percent during the same period last year. Both provincial and federal PSDP contributed to this decline. However, current expenditures also slowed down due to lower subsidies, the report mentioned.
On the revenue side, FBR tax receipts posted a growth of 16.8 percent for H1-FY14, against a nominal increase of 4.5 percent during the same period last year, which was mainly due to an increase in tax rates and a rise in general price level in the economy.
However, according to SBP estimates, FBR collections for H1-FY14 are short by around Rs 80 billion relative to the half year target, and will need to grow by 36.6 percent in the second half to achieve the target set for FY14. This would be challenging, given the pattern of revenues collection and the nature of tax reforms undertaken so far.
The State Bank said that improvement in the fiscal and external accounts in the second half of FY14 depends on the expected proceeds from the auction of 3G licenses and Coalition Support Fund (CSF) inflows. The country expects to receive $702 million CSF inflows during H2-FY14, out of which $352 million have been realised in February 2014.
"If expected official external inflows including PTCL privatisation proceeds, the OGDCL GDR, a new Euro Bond, and fresh inflows from multilateral creditors are realised in H2-FY14, SBP''s forex reserves are likely to exceed initial projection for the full year," the report said.