The Federal Board of Revenue, as expected, and in accordance with its past performance scaled down its revenue target for the current fiscal year by Rs64 billion to Rs1,604 billion. This comes despite the austerity measures taken to boost revenue by Rs53 billion in the last quarter. Similarly, going by the government's past records, slippages in expenditure may also come on surface by the end of the fiscal year.
Revenue balance - the mismatch of actual revenues and expenditures to budgeted amounts - had to be balanced, if not in surplus, by June 30, 2008, as per Fiscal Act 2005. However, the revenue deficit was 3.5 percent of GDP in FY08. The deficit reduced to 2.1 percent of GDP in FY09, but surplus could not be achieved and FY10 depicted a similar story.
In the ongoing fiscal year, amid devastating floods, economic growth remained subdued especially in the tax paying sectors. The benefit of high commodity prices primarily accrues to agriculture and export-oriented sectors, which effectively make minimal contribution to the exchequer. In the meanwhile, LSM growth remained in red for most part of the year to date.
With no RGST and overrun in subsidies, especially in the power sector, and the decision to protect consumers from the impact of international oil prices, higher revenue deficit is inevitable in FY11.
Nonetheless, there is marginal improvement in the abysmally low tax-to GDP ratio expected by the FBR. As stated in its quarterly report, the tax-to-GDP ratio is planned to be increased from the lowest level of 9.1 percent last year to 9.4 percent in FY11. But it is still far away from its five-year target of 13-15 percent of GDP.
For that, there is an urgent need to broaden the tax net by bringing agriculture and large number of services in the net to enhance tax compliance and remove widespread exemptions. These require tough political decisions which are hard to come by under the current set-up. Hence, the medium to long-term targets are to remain elusive.
Let's not delve too much into the distant future, the issue at hand is of financing the slippage in deficit within this year. Foreign flows for budgetary support are far and few. The government received just Rs48 billion from external sources on net basis to finance the budget against the full-year target of Rs248 billion.
This puts more and more pressure on domestic banking sources to fill in the widening gap. While there are hopes that the release of CSF to the tune of a billion dollars before the year-end will add some amount to foreign inflows, it is likely to remain well below the targeted amount.
However, the fiscal managers have done well to put reins on inflationary borrowing from the State Bank which, as of March 19, was at Rs87 billion for year-to-date versus Rs129 billion in the similar period last year. Mind you, this note-printing peaked at Rs328 billion in December 2010, so the efforts to reduce it are commendable.
Non-banking domestic sources picked up in the third quarter of the fiscal year as the government raised Rs61 billion from the NSS counter during January-February versus Rs81 billion in the first six months. With higher reliance on scheduled banks borrowing, the government is able to tame its note-printing practice. As of March 19 the year-to-date borrowing from commercial banks was as high as Rs339 billion compared to Rs173 billion in the similar period last year. And this is likely to increase in coming months.
This is a classic case of crowding out the private sector; nonetheless, it's still better than the note-printing which taxes the masses indiscriminately through high inflation.
MONEY AGGREGATES:
There is not much to talk on monetary aggregates for the week ending March 19. The currency-in-circulation continued with its random walk, albeit, northward direction, declined by Rs20 billion to make the year to date increase at Rs254 billion. The demand and time deposits increased by Rs16 billion to reach Rs281 billion. Overall money supply marginally decreased by Rs4 billion.
The government continued its surprising trend of slashing borrowing from the State Bank while substituting to commercial banks - net government borrowing fell by Rs13 billion for the week ending March 19.
The Rs14 billion rise in credit to private sector is showing a consistent slow growth in private credit, which reached Rs203 billion for the year to date versus Rs139 billion in the corresponding period last year. (Feedback at ali.khizar@br-mail.com)

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                     KEY MONETARY AGGREGATES AS ON  MAR 19
                                                                     Rs (mn)
                                    19-Mar            12-Mar          Change
Currency in Circulation            254,994           275,231        (20,237)
Total Demand & Time Deposits       280,941           264,683          16,258
Broad Money (M2)                   541,109           545,514         (4,405)
NFA                                176,883           176,189             694
NDA                                364,224           369,326         (5,102)
Net Government Borrowing           308,035           321,186        (13,151)
Borrowing for budgetary support    426,859           438,288        (11,429)
    from SBP                        87,328           109,571        (22,243)
    from scheduled banks           339,531           328,717          10,814
Commodity operation              (122,648)         (120,668)         (1,980)
Credit to non-govt sector          229,868           215,759          14,109
    to private sector              202,757           188,136          14,621
    to PSEs                         26,890            27,281           (391)
Source: SBP
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