The results of fiscal operations for 2021-22 have been released. It is a spectacle of one of the worst fiscal outcomes in the country’s history. A great deal about it was already speculated based on Revised Estimates at the time of the budget, yet the final picture is still a grim reading.

We would examine the budget outcomes primarily with respect to the budget estimates, IMF programme targets and reflect on their continuing implications for the economy.

The budget had estimated a federal fiscal deficit of Rs 3,990 billion and, with an estimate of Rs 575 billion for provincial surplus, the overall fiscal deficit was Rs.3415 billion.

Against these targets, the actual federal deficit was of Rs 5,611 billion while the overall deficit stood at Rs 5,259 billion, indicating an increase of 41% and 54% respectively, in federal and overall deficits relative to budget estimates.

Remarkably, the year saw the highest ever increase in nominal GDP due to rebasing of national accounts with respect to the change in base year and inclusion of hitherto unaccounted for new economic activities. The GDP was estimated at Rs 48 trillion in 2020-21 and projected to grow to Rs.54 trillion in 2021-22 but the rebased GDP (announced in January 2022) has worked it out at Rs.67 trillion, an increase of 40% relative to last year and 24% relative to the estimate at the time of the budget. This is a phenomenal increase in GDP, which has moderated the otherwise unenviable fiscal outcomes.

Based on budget estimate of GDP, federal deficit was budgeted at 7.1% of GDP. On this GDP, the actual deficit comes out at 10.4%, which is one of the highest in the country’s history. However, on the new GDP, the deficit is 8.4%, which is still very high. Against an estimated provincial surplus of Rs 575 billion, the actual surplus was Rs 351 billion. With this, overall deficit comes out at 7.9%.

The primary deficit (excluding interest payments) was budgeted at Rs 360 billion (0.5% of GDP) while the actual deficit has come out at Rs.2077 billion (3.1% of GDP), which is 5.8 times the budgeted level. This is the third consecutive year when against the IMF target of building a primary surplus, the government has missed the target by a significant margin. Apparently, it was such failures that have led the IMF to impose the harsh conditionality upfront.

It would be useful to examine what factors have contributed to such a high deficit. The Revised FBR target (after mini-budget of January 2022) was Rs 6,100 billion (as against Rs 5,827 billion at the time of budget) which was comfortably achieved as the actual was Rs 6,142 billion.

The net revenue after provincial transfers was estimated at Rs 4,497 billion, which was revised to 4613 billion after mini-budget. The actual net revenue, however, was Rs 3,739 billion. The single largest revenue loss was nearly Rs.500 billion in petroleum levy, which does not form part of the divisible pool. The net revenue shortfall is therefore Rs.874 billion.

On the expenditure side, the budget had estimated total expenditure at Rs 8,487 billion. As against this, actual expenditure came out at Rs 9,350 billion, which is an overrun of Rs 863 billion. Adding the revenue shortfall of Rs 874 billion to excess expenditure of Rs 863 billion, we have a federal deficit of Rs 1,737 billion over and above the planned deficit of Rs 3,990 billion.

The federal deficit is therefore Rs 5,727 billion as opposed to Rs 5,611 billion. The difference is Rs116 billion, which is the same as pointed out in the last paragraph on account of higher net revenues that should have accrued after the mini-budget.

We now review what expenditures have led to overruns. The interest expense was budgeted at Rs 3,060 billion whereas the actual expenditure stands at Rs 3,182 billion, which is an overrun of Rs122 billion.

The defence expenditure was budgeted at Rs 1,370 billion whereas the actual expenditure is Rs 1,412 billion, which is an overrun of Rs 42 billion. Running of civil government was budgeted at Rs 479 billion while actual expenditure is Rs 546 billion, with an overrun of Rs 67 billion. Pensions were budgeted at Rs 480 billion while the actual expenditure is Rs 542 billion, with an overrun of Rs 62 billion. Grants to provinces and others were budgeted at Rs 1,168 billion while the actual is Rs 1,239 billion, with an overrun of Rs 71 billion. These overruns add up to Rs 364 billion.

Interestingly, a greater part of this overrun has been covered by the savings in the development spending which was reduced from its budgeted level of Rs 900 billion to Rs 558 billion, a reduction of Rs 342 billion. However, net lending to provinces increased from Rs 64 billion to Rs 143 billion, which is an overrun of Rs 79. Therefore, the net savings in PSDP (Public Sector Development Programme) and net lending is Rs 263 billion, which if subtracted from Rs 364 billion, leaves an overrun of Rs 101 billion.

The real culprit of overruns is the head of subsidies which is the perennial bane of the country’s fiscal finances. Against a budgeted level of Rs 682 billion the actual subsidies were a staggering amount of Rs 1,529 billion, an overrun of Rs 847 billion. Adding Rs 101 billion, the expenditure overrun is Rs 948 billion. We had earlier noted an overrun expenditure of Rs 863 billion. The difference of Rs 85 billion is part of a statistical discrepancy of Rs 197 billion.

With such massive over-spending, it should not be surprising that the country is facing unprecedented inflationary pressures, so much so that the State Bank of Pakistan (SBP) has projected its inflation between 18-20% during the year. If we look at the money supply we notice a high growth of 13.5% which was contained only because of a massive decline in net foreign assets.

We do not have the liberty of spending another year with similar profligacy. Full brakes will have to be applied to ensure that we prevent a major collapse of the economy. The new fiscal year had an auspicious start (BR issue of 10-8-22) which is heartening but we have to stay the course.

We have a very fragile economy; it doesn’t take too many missteps to derail it from the steady path. The sacrifices people have made to improve fiscal finances by stoically facing huge price increases should be converted into a stable macroeconomic framework and should form the foundations of an economy capable to stand on its own feet.

Copyright Business Recorder, 2022