Waqar Masood Khan
In our recent submissions (BR: 19-6-2018), while commenting on the first eleven-month fiscal outcome, we had apprehended that the deficit could reach as high as 7%of GDP or Rs 2.4 trillion. However, a report has indicated that it may well be higher at 7.1% or Rs 2.45 trillion. Excluding circular debt settlement, this is the highest deficit since 2012, when it was recorded at 8%. Also, it is the second consecutive year witnessing a new wave of fiscal indiscipline in the country. It is worrying since it has happened in the backdrop of a successfully completed IMF program that saw a major fiscal adjustment of nearly 4%.
With such a heavy dose of over-spending, there is every likelihood that the external account would again register a monthly deficit of $2 billion taking the total to $18 billion or 6% of GDP, the highest in more than a decade. Not surprisingly, the SBP reserves have plummeted to below $10 billion, less than two months of imports, at the close of the fiscal year. Pakistan is exposed to significant risk of economic disruption. The Moody’s downgrade of outlook, from ‘stable’ to ‘negative’, is an early warning signal for what can be expected unless corrective actions are adopted without further loss of time.
A more worrying development is the major slowdown in tax collections which has registered a paltry growth of 12%, only slightly better than 8% last year, but grossly below the growth of 20% registered in the first three years of the previous Government. This poor performance includes the tax receipts under the amnesty scheme. It is still not clear how much tax was received under the amnesty scheme. Some reports have indicated that Rs 72 billion have been received as taxes under the amnesty scheme. If we exclude this number, the latent growth in taxes comes to only 10%. Without amnesty receipts, tax collections growth is 10%. The tax shortfall is estimated at Rs 243 billion, or 0.6% of GDP has also contributed to high fiscal deficit. Equally importantly, the non-tax revenues, most notably GIDC, were significantly short as actual receipts in the first three quarters of the fiscal year amounted to only 39% of the budget. Even more disconcerting reports is that both Punjab and Sindh have overdrawn their balance from the SBP by Rs 50 billion and Rs 10 billion, respectively. This essentially means that far from contributing Rs 300 billion as surplus for the year, which would have acted to reduce overall fiscal deficit, the actual position would follow what happened last year, i.e., rather than surplus there a deficit of Rs.160 billion. The above factors have gone in bringing about a fairly disappointing fiscal outcome.
The momentum of tax reforms has completely broken down. The growth in the first three years has again given way to dependence on low tax elasticity as no further measures to raise taxes and to strengthen the tax system was undertaken. Unlike that, highly misplaced and unwarranted tax concessions have been given by authorities who lacked a true understanding of tax dynamics and based their decisions on half-baked ideas and gut-feelings. Much of that loss has yet to go into effect as it would be applicable during the new fiscal year. Evidently, unless major reversal of these relief measures is undertaken, the outlook for tax collections would remain negative in the next year also.
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