Dar’s magical wand shrinks fiscal deficit
Pakistan’s fiscal deficit for nine months has been restricted to 3.1 percent of the GDP-–an absolute reduction of Rs234 billion. No wonder! Only an accountant can trim numbers so quickly and that too without having implemented tough reforms. The government has the luxury of running a deficit of up to Rs700 billion in the last quarter to stay within the permissible limit of 5.8 percent of the GDP.
Isn’t it interesting that tax revenues targets have been missed but fiscal deficit is still tamed? The fiscal affairs are well managed by applying a combination of smart and manipulative ways of transferring funds from here to there.
Earlier this year, the Ministry of Finance had conveniently moved USF funds (Rs62bn) into its accounts—its legality is in question and the case is in Supreme Court. Then the transfer of profits from the State Bank of Pakistan increased by Rs50 billion to Rs205 billion in the first nine months. Compared to this, SBP’s full year profits last year were Rs233 billion, out of which Rs220 were transferred. This year, the government is transferring higher profits despite the fact that central bank is suffering from exchange losses.
Another probable accounting tactic is the delay in fiscal transfers to provinces to March 31 and that is why provinces are showing fiscal surplus of Rs217 billion in nine months. The other ploy eagerly deployed by the FBR is the stopping of refunds on sales tax, which in the year to date are close to Rs100 billion. Collectively over Rs400 billion has been managed by the Ministry of Finance to curtail deficit.
With all these gimmicks revenues grew by 17 percent and expenditure growth was checked to mere 4 percent in 9M FY14. Sales tax (21% to Rs717bn) and direct taxes (22% to Rs599bn) contributed most to the tax revenues growth, thanks to increasing GST rate, holding back refunds and higher tax rates on individuals and consultants; although corporate tax rate is slashed by one percent.
Customs duty was one of the underperformers within FBR domain as levied collected on it is down by 1 percent. The reason is due to muted growth in imports while dutiable imports might have experienced a little dip. Then the petroleum levy is also down by 11 percent and that is because the government refrained from fully passing on the oil price hike to consumers and a 6 percent fall in the import of petroleum products imports on account of rupee appreciation.
On the non-tax revenues, higher growth in SBP profits (37% to Rs205bn) and other revenues (67% to Rs160bn) are the highlights. This has compensated the fall in defence receipts (56% to Rs78bn) which is down due to pending Coalition Support Fund monies.
On the expenditure side, current expenditure grew by 10 percent, which needs to be curtailed in the upcoming budget. This is despite the 30 percent cut in non-salary expense as domestic interest servicing soared by 18 percent to Rs854 billion and upward revision in salaried expenses.
Mind you, in the last five years government servants’ salaries have been increased by 120 percent to increase the ratio of salary to non-salary expense of the government’s machinery from 60:40 to 83:17. Ishaq Dar should prepare the parliamentarians to withstand the pressure of employees and keep salaries unchanged.
As a consequence, development spending faced the cuts-–PSDP is the main adversary which is down by 4 percent. This is not a wise tactic to curtail deficit by slashing development spending at the time of muted economic growth.
To add to the colours, the financing of fiscal deficit has been balanced between banking sources (decreased by 49% to Rs437bn) to non-banking sources (increased by 119% to Rs425bn); thanks to the option of direct participation by pension funds and other institutions. The financing mix would have improved further had the government accounted for gift from the Saudis into the fiscal accounts. Wink! Wink!!
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Pakistan: Consolidated fiscal position
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Rs (bn) 9M FY13 9MFY14 chg
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Consolidated Revenue 2125 2477 17%
Tax revenue 1447 1714 18%
Direct tax 491 599 22%
Sales tax 595 717 21%
Non-tax revenue 554 636 15%
SBP profit 150 205 37%
Consolidated expenditure 3171 3289 4%
Current expenditure 2642 2905 10%
Non- current expenditure 446 556 25%
Budget balance (1046) (812) -22%
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Source: Ministry of Finance
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Pakistan: Financing
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Rs (bn) 9MFY13 9MFY14 chg
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Total Financing 1046 812 -22%
External financing (4) (50) 1117%
Disbursements 160 196 23%
Repayments 164 246 50%
Domestic non-bank 194 425 119%
Domestic bank borrowing 857 437 -49%
Privatisation 0 0
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Source: Ministry of Finance
