The information on fiscal operations in the first quarter of 2023-24 by the Federal and the four Provincial governments has been released recently by the Federal Ministry of Finance.
The budgetary outcome overall appears to be satisfactory in nature. The consolidated budget deficit is 0.9% of the GDP, as compared to 1% of the GDP in the corresponding quarter of 2022-23. Also, a primary surplus of 0.4% of the GDP has been generated, as compared to 0.2% of the GDP in the first quarter of 2022-23.
The question is how this positive outcome has been achieved? What are the prospects for the subsequent quarters of 2023-24 based on developments in the first quarter? Will the performance criteria and indicative targets on the fiscal front in the IMF Stand-by Facility be adhered to up to the end of the IMF programme in April 2024?
We look first at the key summary magnitudes. The first key number is the level of FBR revenues. They have shown a growth rate of 25% and demonstrated no increase in the tax-to-GDP ratio. The annual target growth rate in FBR revenues is significantly higher at 31.5%.
This implies that these revenues will have to increase by as much as 33.1% in the next three quarters of 2023-24. Such a high growth rate has never been achieved before and will require a major improvement in performance by FBR, especially if the rate of inflation starts coming down in the latter half of the year.
Examination of the performance of individual FBR taxes reveals that both income tax and excise duty have performed well with growth rates of 36.9% and 62%, respectively. This is primarily due to the rise in tax rates and high inflation.
However, the performance of sales tax and customs duty has been disappointing with growth rates of only 13.2% and 10%, respectively. This is due particularly to the lack of growth in imports, which have declined even in rupee terms by 2.5% in the first quarter of 2023-24.
For achievement of the annual targets, the growth rate of sales tax and customs duty will have to rise in the next three quarters to 47.7% and 52.1%. This will require a quantum jump in imports. Overall, the growth rate of FBR revenues in the first quarter of 25% will have to rise above 33% in the next three quarters, which looks unlikely.
There is a need also to highlight the slack performance of the Provincial governments in tax collections, with a growth rate of 18.2%, well below even the rate of inflation. Achievement of the annual Provincial own- revenue target will require increased mobilization of tax revenues by 33.5% from October 2023 to June 2024.
The performance of non-tax revenues has been exceptional in the first quarter at the Federal level, with a growth rate of over 115%. This is primarily attributable to the quantum jump of almost five times in the yield from the petroleum levy, due to the big escalation in the rate of this levy.
The high growth rate in Federal non-tax revenues will need to be sustained throughout the year if the ambitious growth target is to be achieved of 70.5%. In particular, the transfer of net profits of the SBP to the Federal government will have to play a critical role. They are expected in the Federal budget to increase from Rs 371 billion in 2022-23 to as much as Rs 1113 billion in 2023-24.
There has been rapid growth in current expenditure in the first quarter. It has gone up by 22.1% at the Federal level and by as much as 32.4% in the case of the four Provincial governments combined.
The primary reason for the escalation at the federal level is the quantum jump in debt servicing of 44.6%. For the year it will be close to 46%, due to the extraordinarily high level of interest rates and rise in the stock of government debt.
The IMF expects the annual debt servicing in 2023-24 to approach Rs 8614 billion, while the provision in the Federal budget is for Rs 7,302 billion. As such, the IMF projection is for a budget deficit of 7.5% of the GDP in 2023-24 as opposed to 6.5% of the GDP in the Federal budget.
There are some estimates in the information on fiscal operations which require proper explanation by the Federal Ministry of Finance. The first query relates to the increase of 18.7% in the payment of pensions in the first quarter. Earlier this year pensions were increased by 31%. Therefore, there are probably some pending payments.
Second, there has apparently only been a Rs 2 billion outlay on subsidies in the first quarter, when the annual commitment is for Rs 1396 billion in 2023-24, according to the IMF estimates in the July Staff Report on the new Stand-by Facility.
The subsidies include the provision of Rs 579 billion in 2023-24 as subsidy to WAPDA/PEPCO and K-Electric for the IPPs and the tariff differential subsidy, and to PASSCO, USC, etc. With virtually no subsidy payment in the first quarter, the implication is that the liabilities have been deferred to the subsequent quarters.
A similar problem is observed at the Federal level in the payment of grants. The Federal budget envisages a 21.7% growth in the outlay on grants in 2023-24. However, the actual payment of grants in the first quarter of 2023-24 shows a fall of 11%.
These grants include special subventions to different regions, to the Railway, HEC, and a large grant of Rs 466 billion to the BISP (Benazir Income Support Programme). Here again, there is the likelihood of lower than required disbursement of grants in the first quarter of 2023-24.
The conclusion is inevitable on the Federal expenditure front of underpayment against expenditure obligations probably to show a lower deficit. Against an average quarterly payment of pensions, subsidies and grants combined of Rs 851 billion, the actual expenditure in the first quarter is Rs 382 billion.
This represents an artificial cutback in expenditure of up to Rs 469 billion. Consequently, the budget deficit has been reduced from Rs 1432 billion, equivalent to 1.3% of the GDP, to 0.9% of the GDP. Further, the primary surplus of Rs 417 billion gets converted into a deficit of Rs 52 billion. It is essential that the Ministry of Finance clarifies why the expenditures reported on pensions, subsidies and grants are substantially lower than the levels budgeted in the first quarter of 2023-24.
There is evidence also of significantly lower expenditure on the PSDP at the Federal level. Only 4% of the annual PSDP target spending was met in the first quarter. This is almost 39% lower than the actual spending in the first quarter of 2022-23. Does this imply that the already low federal PSDP will be cut back sizably during 2023-24 to meet the budget deficit target?
There is a need to highlight the sharp contrast between under-provisioning of budgeted expenditure by the Federal Government and profligate spending by the Provincial Governments. The current expenditure of the latter four Governments combined has increased by 33.5% and that on development by as much as 61.8%.
The consequence is the generation of a very small Provincial cash surplus of Rs 50 billion in the first quarter, when the targeted level for the year is Rs 600 billion. In fact, two of the Provincial Governments, namely, Punjab and Khyber-Pakhtunkhwa have actually shown cash deficits.
Therefore, unless the Provincial Governments manage their fiscal operations better and generate the targeted cash surplus in 2023-24 it will be extremely difficult to show a primary surplus in the consolidated budgetary position at the end of the year.
Finally, the fragile state of public finances of Pakistan today is indicated by the fact that the net revenue receipts of the Federal Government, after revenue transfers to the Provincial Governments under the NFC Award, are barely adequate to cover the costs only of debt servicing. In the first quarter, the net revenue receipts exceeded debt-servicing by only Rs 28 billion.
For the year as a whole, even if the revenues reach budgeted levels, the mark-up payments, as per the IMF estimates, of Rs 8614 billion, will only be covered up to Rs 6928 billion by net revenue receipts. Consequently, part of the cost of debt servicing and all other Federal expenditure will have to be financed by borrowing. In the event of an EFF facility with the IMF after the SBF, there will be pressure to cut up sharply on expenditure over the next three years.
Overall, superficially, the first quarter outcome is positive with a modest consolidated budget deficit and a significant primary surplus. But this appears to be due to under-allocation of funds by the Federal Government to subsidies, grants and pensions and cutback in the PSDP.
Also, FBR revenue targets will be difficult to achieve in 2023-24 unless there is a strong recovery in the level of imports in coming months. Further, the Provincial Governments will have to get their budgetary act together and ensure that they collectively generate a cash surplus of Rs 600 billion by the end of the year.
The first quarterly review of the IMF Stand-by facility is likely to focus, first, on risks associated with FBR revenues unless there is a big jump in imports and the process of appreciation of the rupee comes to an end. Also, exporters have complained about the excessive holding back of refunds. This needs to be investigated.
Second, the Fund mission may want to know why the expenditure on subsidies, grants and pensions has been deferred in the first quarter. Finally, the IMF may emphasize on the need for the Provincial governments to behave in a fiscally more responsible manner and generate a cash surplus of Rs 600 billion by the end of 2023-24.
Copyright Business Recorder, 2023