The year, 2018-19, has come to a close with a very different outcome than was originally anticipated. The budget for the year was presented initially in May 2018 by the outgoing PML(N) Government. This envisaged a budget deficit of 4.9 percent of the GDP, implying a sizeable reduction in the deficit of 1.7 percent off the GDP from the level of 6.6 percent of GDP in 2017-18. This was based on the expectation of a relatively strong revenue performance by the FBR in raising tax revenues by almost 19 percent.
The new PTI government presented two mini- budgets thereafter, one in September 2018 and the other in January 2019. The target deficit for the year was raised somewhat to 5.1 percent of the GDP. The Budget for 2019-20 was presented in early June 2019. The National Assembly was informed that there had been significant slippage in the attainment of the fiscal target for the budget deficit. Based probably on data up to April 2019, the budget deficit was estimated at 7.2 percent of the GDP, higher by 2.3 percent of the GDP over the original target for the year.
The SBP has recently released the statistics on the level of Central Government debt as on the 30th of June 2019. The implied budget deficit based on the debt numbers is a minimum of 8.9 percent of the GDP. The FBR has put in a very disappointing performance and the total collection is even below the level in 2017-18 and there is a shortfall in relation to the target for the year of almost Rs 600 billion.
The implication is that the budget deficit had gone completely out of control. The divergence from the original deficit target is as much as 4 percent of GDP, equivalent to a spillover of Rs 1535 billion. This is due to a near 55 percent shortfall in revenues and the remainder, 45 percent, because of higher expenditures, especially on debt servicing.
The divergence of as much as 4 percent of the GDP between the projected and the actual budget deficit has never been seen before. In 2017-18, the target for the deficit was 4.1 percent of the GDP and the actual was 6.6 percent of the GDP. Similarly, in 2016-17, the deficit aimed for in the budget was 3.8 percent of the GDP and the actual deficit was higher by 2 percent of the GDP.
The extraordinary spillover in the budget deficit by 4 percent of the GDP casts serious doubts about budgetary planning, financial forecasting and the overall quality of financial management by the Ministry of Finance. It has effectively made a mockery of the budgeting exercise. Perhaps one of the reasons for the breakdown is the relative inexperience of the new government and the turnover at the highest level in the MOF and in FBR.
The fundamental implication of the adverse outcome in 2018-19 is that the base year fiscal magnitudes for the IMF Programme from 2019-20 to 2021-22 are now completely out of the line from the numbers assumed by the Fund for 2018-19. For example, the Programme Budget projections had worked with FBR revenues of Rs 4150 billion. The actual outcome is lower by over Rs 300 billion. Similarly, the budget deficit was targeted on the basis of the revised estimates at 7.3 percent of the GDP. It has turned out to be almost Rs 600 billion higher.
Consequently, with such large changes in base year magnitudes the targets are no longer effectively valid. Already, the Programme was front loaded but now with a worse outcome, if the targets for 2019-20 remain unchanged, then the extent of frontloading of the Programme in the first year will be even greater.
An example will illustrate the seriousness of the problem. The FBR revenue target in the IMF programme has been set at Rs 5503 billion for 2019-20. With an estimated revenue of Rs 4150 billion in 2018-19 this would have required a growth rate of 33 percent in 2019-20, which was already ambitious. Now with base year revenues Rs 300 billion below the original estimate, the required growth rate in FBR revenues for 2019-20 has gone up to a near impossible 44 percent.
The key fiscal target for 2019-20 in the Fund Programme is the size of the primary deficit. It has been set at 0.6 percent of the GDP. The assumed outcome in the Programme estimates was 1.8 percent of the GDP in 2018-19. This reduction of 1.2 percent of the GDP was already ambitious. Now, with the primary deficit in 2018-19 at close to 3.5 percent of the GDP the target of 0.6 percent of the GDP has lost all credibility and is definitely well beyond the realm of possibilities.
The question is how the Fund will react to the substantially changed numbers of 2018-19 thereby implying much more fiscal adjustment. One approach is to keep the change expected at the original rate. That is, in the case of the primary deficit it would continue to be based on the same change as originally asked for of 1.2 percent of the GDP. This would imply change from 0.6 percent of the GDP to the new target of 2.3 percent of the GDP in 2019-20.
However, the likelihood is high that the adjustment asked for will be significantly higher. One extreme is to keep the primary deficit target for 2019-20 fixed at 0.6 percent of the GDP irrespective of the outcome in 2018-19. This will require massive adjustment by the GOP. Consequently, it is almost pre-determined that the first Programme review in the second quarter of 2019-20 will be a failure with most of the budgetary targets not being met.
This outcome requires more conjecturing. Will waivers be given or more asked for by the Review Mission in the form of a mini-budget with more taxation proposals and/or expenditure cuts? Overall, the country is moving into a period of new uncertainty relating to the future of the IMF Programme. In the event the Programme falters the risk of a breakdown in meeting the country's external obligations will be greatly enhanced.
(The writer is Professor Emeritus at BNU and former Federal Minister)
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