ARTICLE: The information on fiscal operations in 2019-20 by the federal and provincial governments was released a few days ago. The very pleasant surprise is that the consolidated fiscal deficit has turned out to be lower than anticipated. The deficit is 8.1 percent of the GDP. At the time of the presentation of the Federal Budget for 2020-21, the revised estimates indicated that the deficit was likely to be 9.1 percent of the GDP. There was some apprehension that it might even approach 10 percent of the GDP due to the additional costs of relief and development package of Rs 1250 billion implemented after the rapid spread of Covid-19 in the last quarter of 2019-20.
The performance of the Ministry of Finance must be commended for managing the budgetary process well in 2019-20. In fact, prior to Covid-19 the budgetary performance criteria in the IMF Program up to March 20 had all been met. The original budgetary target was 7.1 percent of the GDP and the final outcome is increase of only 1 percent of GDP. In fact, last year in a more normal economic environment the budget deficit had risen very sharply from 6.6 percent of the GDP in 2017-18 to 8.9 percent of the GDP. Despite the difficult conditions it has now been brought down by 0.8 percent of GDP in 2019-20 to 8.1 percent of the GDP.
The fundamental question is what are the factors that have contributed to this containment of the fiscal deficit? There are at least four reasons for the deficit being even lower than the level projected in the revised estimates for 2019-20 as given in the Annual Budget Statement (ABS) for 2019-20.
The first reason for a lower deficit is the higher level of profits of the SBP which accrue to the Federal Government as non-tax revenues. According to the revised estimates in the ABS it was expected to be Rs 785 billion. It has actually turned out to be Rs 935 billion, that is, Rs 150 billion higher. Profits were at the all-time record level of Rs 300 billion in the fourth quarter, equivalent to 32 percent of the annual profits.
There is no immediately obvious reason why SBP profits went up so sharply by almost 50 percent in the fourth quarter as compared to the level in the third quarter. If anything, the reverse repo rates in the open market operations by the SBP had fallen significantly. There is need for examination of the annual financial report of the SBP to be able to identify the reasons for the sharp jump in profitability in the fourth quarter. Perhaps the SBP has been generous in releasing profits in advance to the Ministry of Finance. It will be useful if the SBP could release a press statement for the more than anticipated level of profits in 2019-20.
The second reason is the higher than projected level of revenues from the sales tax and the petroleum levy. According to the revised estimates, the revenue from sales tax was anticipated at Rs 1427 billion. It has turned out to be Rs 1596 billion, higher by Rs 169 billion. This has been achieved despite the drop in the tax bases of 23 percent in imports in rupees and a 26 percent reduction in output of large-scale manufacturing in the fourth quarter of 2019-20. Has there been a big reduction in the normal payment of refunds during this quarter?
Petroleum levy revenues are also higher by Rs 33 billion in relation to the revised estimate for 2019-20. Prices of petroleum products fell in the fourth quarter of 2019-20. Despite the fall the Petroleum Levy yielded more revenues.
The third factor which is not immediately visible is the substantially higher level of cash surplus of the four provincial governments combined. The revised estimate in the ABS of 2019-20 had projected this magnitude at close to Rs 81 billion. It has actually come in 178 percent higher at Rs 225 billion.
This big jump in cash surplus of the provincial Governments has occurred despite the fact that the 'above the line' estimates indicate that the Punjab and Khyber Pakhtunkhwa governments went into a deficit. Also, the provincial governments generated a big cash surplus despite a 7 percent decline in federal transfers to them in the fourth quarter as compared to the level in the fourth quarter of 2018-19. According to the monetary statistics of the SBP the cash surplus generated by the four Provincial governments combined in 2019-20 was Rs 66 billion. This is Rs 159 billion lower than the magnitude reported in the fiscal operations for the year.
The fourth and last factor is the big cut in development spending in the last quarter of 2019-20. During the first three quarters of 2019-20 development expenditure by the Federal and Provincial Governments had been scaled up by 14 percent. However, there was a delay in releases for projects in the fourth quarter. Consequently, development spending fell by over 21 percent in the last quarter. This was implemented at a time when the economy is in a deep recession and higher public spending is required to provide an economic stimulus. Once again, growth has been sacrificed to achieve greater stabilization of the economy.
The above four factors, viz., higher SBP profits, larger sales tax and petroleum levy revenues, bigger cash surplus of the provincial governments and a sizeable cut in development spending have combined together to reduce the budget deficit by Rs 650 billion, equivalent to 1.6 percent of the GDP. In other words, the deficit would have been 9.7 percent of the GDP in the absence of these four favorable factors.
The target for 2020-21 requires a further reduction in the budget deficit by 1 percent of the GDP to 7.1 percent of the GDP. An ambitious target has been set of growth in FBR revenues of 24 percent at a time when the economy is in a state of recession. Hopefully, the Ministry of Finance will repeat its good performance in 2019-20 in 2020-21.
(The writer is Professor Emeritus at BNU and former Federal Minister)
Copyright Business Recorder, 2020