The core of the macro economic woes is fiscal and without getting fiscal house in order, there is no stabilization. The numbers for the full year FY19 (read “Reported fiscal deficit-not too scary”) arrived at Rs3.44 trillion – 8.9 percent of GDP which is a deviation of 1.7 percent (Rs655bn) from revised number of 7.2 percent. What a fiscal mess it was – Miftah presented a number around 5 percent of GDP; Asad came up with two mini budgets, and then this.

Under the IMF, the primary deficit is the key target. The deficit is at 3.5 percent in FY19 and lowering it to 0.6 percent of GDP is an uphill task – not many believe that it is achievable. The SBP Governor is clear that debt servicing is not what government is targeting – the key is primary deficit, but higher interest rates limits the economic growth and it limits the tax collection growth, and in turn makes it difficult to lower primary deficit.

Anyhow, all eyes are on tax revenues – the shortfall in FY19 is around Rs271 billion which is implying 44 percent growth in FBR revenues is required instead of the budgeted 35 percent. In FY18, 43 percent of country’s taxes were collected at imported stage (for details read “Import compression and taxation”). Hence, shrinking imports will seriously hamper tax potential. Nonetheless, the benefit of currency depreciation on tax collection in rupees will partially nullify the impact of slowdown.

Having said that, the 1QFY20 tax revenue or fiscal deficit targets will likely be missed; and the axe will come on development expenditure – release in first two months is mere Rs50 billion which implies Rs90 billion is to be spent in September for reaching 20 percent target of full year PSPD budgeted at Rs701 billion. The job loss from import compression amid low development expenditure will stress the domestic consumption and income based tax collection.

The fiscal story is the key; and that is why Shabbar Zaidi is the most important person in PM’s core economic team. The first IMF review is in November or December where the targets of 1QFY20 will be analyzed and future course of policy directions will take place. The CAD number might be better than anticipated; but continuing fiscal slippages will challenge the economic recovery and in turn the timing of easing monetary policy.