An article by Dr Hafiz A Pasha on the subject has been published Business Recorder dated 19.09.2016. Although the author has acknowledged the positive developments, ie, high growth in tax revenue receipts both by FBR and provincial governments, well-controlled current expenditure by federal and provincial governments. However, as per author there are some negative developments ie big fall in federal non-tax revenue, massive cutback in development spending and significantly understated overall fiscal deficit.
The response on the above points is given as under: Federal non-tax revenue: During year 2015-16, an amount of Rs 703 billion was collected as federal non-tax revenue receipts as against Rs 850 billion for the year 2014-15. The main reasons are: a shortfall in receipts from Coalition Support Fund (CSF) and SBP profits. During the last financial year it was expected that a tranche of around US $400 million would be received at the end of financial year but it did not materialise. While SBP profits were also low due to low policy rate regime and lack of privatization receipts from banking sector during the year. Further, receipts from oil sector were also low due to lower oil prices in the international market. However, a decrease in federal non-tax revenue was compensated through rationalisation in current expenditure, which are only 4% higher than last year.
Public Sector Development Programme (PSDP): It is clarified that no cut was imposed on PSDP both by the federal and provincial governments. As per trend, actual expenditures are always low as compared to budget estimates. The main reasons are limited spending capacity of the executing agencies, delay in take off of projects and procurement issues. The total PSDP spending during the year 2012-13 was Rs 695 billion while spending for 2015-16 is at Rs 1185 billion, ie, an increase of 71%. In terms of GDP, during the last three years, the development spending has risen from 3% of GDP to 4% of GDP, a remarkable increase in real terms. In fact the present government has assigned to development spending top priority especially in view of execution of China Pakistan Economic Corridor (CPEC) projects.
Overall Fiscal Deficit (OFD): The fiscal deficit for the year 2015-16 has been missed by around Rs 60 billion. This is only 20 bps of GDP. The revised OFD target in terms of GDP was 4.4% and thus an over-run of only 20 bps, rather than the author's claim of Rs 90 billion or 30 bps. The higher OFD was entirely contributed by higher than expected expenditure at provincial level while federal government partly compensated it through savings in federal deficit in the despite backdrop shortfall in non-tax revenue by cutting current expenditures. It is amusing that the author who managed Pakistan's economy during the period 1996-97, 1997-98 had incurred fiscal deficits at 6.4% and 7.7% of GDP is expressing dismay on the performance of a Government that has brought down the deficit from 8.2% to 4.6%. It is even more amusing that on a number of previous occasions the author has been lamenting that fiscal adjustment has gone too far and that the Fund should be told to stop it. Yet here the very extent of the adjustment is being questioned.
Statistical Discrepancy: There is a fundamental lack of understanding regarding the statistical discrepancy. The internationally accepted definition of fiscal deficit calls for measuring the deficit through the financing rout. Figures relating to financing of budget deficit are real time and cash based. The difference between budget balances calculated from the book balance and the bank balance is recorded as statistical discrepancy. When the cash has not been expended, no effective deficit has been incurred. This Government has not invented this method. Besides, there is a cyclical pattern this statistical discrepancy follows. From its peak build up at the close of the fiscal year, it vanishes mostly in the first quarter. It is meaningless to add these numbers over the tenure of the Government and claim that the Government has taken advantage of such a cumulative discrepancy. This number is self-correcting as explained above. The author's claim that such discrepancies are unprecedented and reflect a breakdown in budgetary process is baseless. In 2005-06 and 2006-07, the statistical discrepancy was a large as 1.0% and 1.34% of GDP and there was no breakdown of the fiscal system.
Public debt to GDP ratio:
-- The gross public debt to GDP ratio was 66.5 percent while net debt to GDP ratio was 64.9 percent as at end June, 2016 as opposed to writer's claim of almost 68 percent;
-- The analysis of public debt to GDP ratio during last 15 years reveals that in the period of high inflation, public debt to GDP ratio performed relatively better as the denominator becomes larger and this ratio mostly hovered close to 60 percent even when real GDP growth was merely half a percent eg 2008-09. While higher inflation could help reduce the public debt-to-GDP ratio yet it has other repercussions for the economy. Therefore, economic managers would always prefer high real GDP growth coupled with low inflation rather than low real GDP growth coupled with high inflation;
Public debt statistics: Public debt stood at Rs 19,678 billion as opposed to writer's claim of Rs 20,051 billion. The public debt number of Rs 19,678 billion is consistent with the definition of public debt as stipulated in Fiscal Responsibility and Debt Limitation Act. The clarity regarding public debt definition has been communicated several times at various forums to the writer, however, this news item is another attempt to deliberately mislead the readers by reporting the number which is inconsistent with the public debt definition;
The cumulative increase in public debt during last 3 years was Rs 5,360 billion as opposed to Rs 5,476 billion as mentioned in the news article;
Public debt increased by Rs 2,297 billion during 2015-16 as compared with Rs 2,676 billion as mentioned in the news article. Apart from fiscal deficit, the increase in Government credit balances with State Bank of Pakistan/commercial banks, debt from the IMF and dual revaluation loss on account of depreciation of US Dollar against other international currencies as well as depreciation of Pak Rupee against US Dollar contributed to this increase. The IMF loans are only applied towards Pakistan's balance of payments and are reflected in its foreign currency reserves;
The author has also indicated some risks to budgetary operations 2016-17. It is clarified that in the budget 2016-17 best estimates relating to revenue receipts and expenditure has been adopted. It would be too early to assess the actual position for current financial year. The key achievements of the present government on fiscal side are as under:-
Fiscal deficit has been reduced from 8.2% in 2012-13 to 4.6% in 2015-16. Tax to GDP ratio has been improved from 10% in 2012-13 to 12.4% of GDP in 2015-16. Un-targeted subsidies have been reduced from 2% of GDP in 2012-13 to 0.6% of GDP in 2015-16. Social spending in BISP has been increased from Rs 3000 per quarter in 2012-13 to Rs 4700 per quarter during 2015-16. The coverage of BISP beneficiaries families increased from 3.70 million in 2012-13 to 5.36 million in 2015-16. Overall PSDP spending has increased from 3.1% in 2012-13 to 4.0% of GDP in 2015-16. The government is confident to further improve the fiscal achievements during the current financial year.
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