Six major fiscal risks identified

Ministry of Finance (MoF) has said that the economy is facing six major fiscal risks including a shortfall in revenue targets which would result in curtailment in development expenditure. This was disclosed by the Ministry of Finance (MoF) in its Mid-Year Budget Review Report FY 2019-20 to be discussed by the federal cabinet on Thursday (today) which will be shared with the National Assembly.

The federal government has not extended any sovereign guarantee during the first six months (July-December) 2019-20 meant to maintain strict financial discipline. The National Assembly in the Finance Bill 2019 (annual budget) enhanced the Public Finance Management Act, 2019, as per requirements of Article 79 of the Constitution of Pakistan. The Act is applicable with effect from July 1, 2019 and has been enforced to strengthen the management of public finances and improving implementation of fiscal policies for better macroeconomic and budgetary management. In compliance with the section 34(1) of the Public Finance Management Act 2019, Mid-Year reporting of the budget developments has been introduced for the first time in Pakistan.

According to the Finance Division, fiscal consolidation measures have brought financial discipline and increased revenue growth by bringing about stability in the economy and it is expected that a path of sustainable economic growth can be achieved. The positive trend in ease of doing business, stable exchange rate, improved current account and better fiscal and monetary management, denote that the economic outlook seems promising.

However, there are certain risks in achieving this fiscal sustainability which can compromise the desired results. The major fiscal risks are as follows: (i) substantial shortfall in tax revenue; (ii) unexpected volatility in exchange rate; (iii) losses and circular debt in energy sector; (iv) increase in pension expenditure and liabilities; and (v) unexpected public debt and financing of fiscal deficit.

Finance Division argued that FBR revenue target for FY 2019-20 is very challenging, unprecedented and all time high, keeping in view the previous year's allocations and actual collections. The performance of FBR in the first half of the FY 2019-20 is very encouraging. However, in order to achieve the annual revenue target, a lot of efforts have to be taken by the tax functionaries even though the number of tax filers has reached around 2.7 million, an increase of almost 40 per cent in the first half has been witnessed.

Any shortfall in the achievement of the targets in tax revenue collection will have adverse consequences and falling short on revenue targets would entail curtailment in development expenditure.

It is evident that the external financing needs are higher over second half of ongoing fiscal year. Any shortfall in external financing would require the government to bridge the gap through domestic debt market. However, the current favourable trends being witnessed in the domestic debt profile signify that the domestic debt profile is projected to improve considerably by the end of the current financial year. The proportion of debt held by SBP is also projected to decline and the proportion of debt raised through long-term instruments is likely to improve. Interest expense for the full year is expected to be lower than the budgeted amount.

Supported by lower-than-budgeted borrowing costs and fiscal deficit and a stable exchange rate, the debt to GDP ratio is projected to decline from 84.8 per cent at the beginning of the current fiscal year to below 83 per cent by the end of the year. This is a welcome development considering the emergent need to lower the debt to GDP ratio over the next few years and bring it below the ceiling of 60 per cent set by the Fiscal Responsibility and Debt Limitation Act, 2005.

The public debt was recorded at Rs 33,303 billion at the end of December 2019 compared with Rs 32,708 billion at the end of June 2019, registering an increase of only 3 per cent during the first six months of FY 2019-20. Though, the government borrowing during this period was Rs 1,546 billion, total public debt increased by only Rs 999 billion. This savings/ differential of Rs 547 billion is attributable to exchange rate appreciation of Pak rupee against US dollar. Out of total financing of Rs 1,587 billion raised during the first half, Rs 21 billion was raised in the form of external grants, Rs 494 billion was raised in the form of external debt and the remaining Rs 1,053 billion was raised in the form of domestic debt.

All the external debt raised during this period was from multilateral and bilateral sources on concessional terms, which is in line with the strategy to meet most of the external financing needs through long-term concessional loans.

During the current financial year, an amount of $ 8.02 billion is due on account of repayments of external debt obtained in the past. The repayment obligations of $ 3.85 billion during the first half of the year have been successfully met and adequate external inflows are in the pipeline to meet the repayments of $ 4.17 billion becoming due in the second half.

All the net domestic debt raised during this period was through long-term government securities (PIBs) and National Saving Schemes. The cost of borrowing through long-term Government bonds has declined by 2 to 3 per cent per annum. In fact, the government was able to borrow in long tenors at rates well below the policy rate of SBP.

Finance Division has claimed that during the Mid-Year FY 2019-20, Pakistan's economy moved progressively along the stabilization and adjustment path. A steady policy mix has appeared to adequately address the macroeconomic imbalances. Structural adjustment process picked up momentum with the initiation of the IMF's Extended Fund Facility programme.

The Monetary Policy, being consistent with the medium-term inflation targets was being continued by SBP. Consolidation efforts on the fiscal front were visible, both on the revenue and expenditure sides. FBR has actively pursued improvement in documentation efforts, including asset revaluation, tight financial scrutiny and introduction of structured mechanisms to formulize business value chains.

During July-December FY 2019-20 Current Account Deficit (CAD) was reduced by 75 per cent, exports increased by 4.5 per cent, rise in workers' remittances by 3.3 per cent, FDI grew by 68.3 per cent, fiscal deficit was contained at 2.3 per cent. Primary balance posted a surplus of 0.6 per cent. Significant increase of almost 16 per cent in FBR tax revenues was witnessed taking them to Rs 2.093 trillion. Ease of doing business ranking was improved by 28 places, improving the country's ranking from 136 to 108.

According to a 40-page report, the market willingness to lend to the government for long tenors at rates below the policy rate reflects the general confidence in the macroeconomic policies of the government. The report says that interest rates remained significantly less than the budgeted amount during this period. Against budget estimate of Rs 1,400 billion, actual interest expense was recorded at Rs 1,281 billion, which was achieved partly due to the re-profiling of short-term debt into long-term debt and partly due to a sharp decline in cost of borrowing in longer tenors.