Waqar Masood Khan
The economy is presenting a mixed picture as the fiscal year is drawing to a close. Since the budget was presented to the Assembly six weeks ahead of the normal schedule, the data provided therein was not comparable to previous data points at this time. However, a clearer picture on economic performance is now emerging.
The national accounts committee meeting was held on 9 April 2018, which announced the revised growth rate for 2017-18 at 5.8% based on the information which, given the lag in compilation, could not be later than end-February at best. So this number is also non-comparable to estimates that are normally announced in the third week of May. Leaving this apart, the growth rate is the highest in last 13 years, which is a very promising sign. This is coupled with price stability as inflation, for the third consecutive year, was firmly below 4%. Investments have marginally increased from 16.1% to 16.4%. The consumer demand is very strong in almost all sectors of spending. Therefore, there are good bases to express optimism.
However, this progress is due to the momentum generated by the reforms done during the first three years of the Government under the IMF program. The reform process was subsequently terminated and it is clear that the key imbalances on fiscal and external accounts, are now resurfacing and threatening the nascent recovery. It is important to examine the two imbalances and make an assessment as to why they have arisen.
The fiscal deficit is the main instigator for causing the external imbalance too. The deficit was brought down to nearly 4.3% in 2015-16 from a high of 8.2% in 2012-13. However, it shot up to 5.8% during 2016-17, in the first year after the program. Two things had catapulted the fiscal performance. The FBR revenues suffered a major decline in growth with only an 8% nominal growth compared to 18-20%, registered during 2013-2016 period. Also, some non-tax revenues also fell significantly short of their target. The provincial surpluses were wiped out to an extent that there was a negative surplus. Against a budgeted surplus of Rs.300 billion, there was a negative surplus of Rs.164 billion. Despite such major failures, the deficit of 5.8% was made possible because of a number of one-off items. These included the sale of security printing press of Government of Pakistan to State Bank of Pakistan and the sale of a CNG-based power plant of government of Pakistan to a public fund owned by the government of Pakistan. The proceeds of both these sales (about Rs 170 billion) were taken as non-tax revenues in the budget. Finally, there was unclaimed profits on the national saving schemes of about Rs 22 billion, which was also taken as non-tax receipts. These items add up to 0.6% of GDP. In their absence, the underlying deficit would have been 6.4%, clearly indicating a major weakening of fiscal discipline.
Turning to fiscal developments during the current year, the deficit target was budgeted at 4.3%. The revised estimate announced at the time of the budget on 27 April is 5.5%, an over-run of 1.2%. The revised revenue estimates are not realistic vis-a-vis the actual performance during the Jul-Apr period. The revised FBR revenues are estimated at Rs 3935 billion, compared to Rs 4013 billion originally budgeted. Even if one takes the growth of 16% in tax revenues, achieved during Jul-Apr, to continue for the next two months – which is a very tall order – there would be a shortfall of Rs 37 billion. Provincial surplus was estimated at Rs 347 billion, which has been revised to Rs 274 billion, an adjustment of Rs 73 billion. However, the expectation of a provincial surplus is misplaced, particularly after there was a negative surplus of Rs 164 billion during 2016-17. The Council of Common Interest (CCI) had passed a resolution, in 2013, for requiring provincial governments to temporarily produce surpluses for the success of the program. As soon as the program was over, the provinces have not only stopped giving surplus but have accelerated the use of past surpluses. Given an election year, it makes no sense that governments would leave behind any cash balances for other governments to spend.
On the expenditure side, one would not know the outcome until the final accounts are compiled. But it is well known that significant items were never budgeted such as the incentives package for exporters and development spending for parliamentarians. Given the excessive needs for borrowings and successive exchange rate adjustments there would be unforeseen expenditures, which seem not fully accounted for in the revised estimates of expenditure. Taken together, we estimate that as much as 1.5% deficit would be contributed by these items, taking the final deficit possibly to 7%. That this ballpark figure is realistic, is supported by an alternative working of the deficit from the just released SBP data on central government debt. During Jul-Mar 2018, the outstanding debt has increased from Rs 20,768 billion to Rs 23,344 billion, which gives an increase in debt (or fiscal deficit) of Rs 2566 billion, which is 7.5% of GDP. We are aware that that there are many adjustments required before this indirect method of estimation would be valid. First, it is only nine months. Second, some deposits kept in banking system would be also be excluded. Adding another quarter would only worsen this estimate. Regarding, deposits, the prospects of accumulation are modest given the last year of government where the preference would be to make immediate expenditures rather than to put them in a bank account for someone else to spend.
What we have laid out above is a fairly grim picture of the fiscal balance. Notice that this doesn’t take into account any unpaid bills, such as circular debt.
The poor state of fiscal finances is fully reflected in the balance of payments. The current account (CA) deficit is well on its way to be 5% of GDP, the highest in nearly a decade. In the first three years, the CA deficit had averaged about 1% of GDP. Such an exceptional increase in aggregate demand has been sustained at the expense of losing half the country’s reserves and accumulating fresh debt burden of at least $13-15 billion. In the process, we have created serious distortions in exchange rate, policy rate and inflation.
The correction of aggregate demand would lead to significant adjustments in these variables. Unfortunately, growth would be affected, inflation would rise due to further depreciation of rupee and an increase in the policy rate. This is the classical adjustment path an economy has to traverse to reach a sustainable state. An added uncertainty is the worsening global outlook of commodity prices, particularly oil, in the aftermath of the US withdrawal from the Iranian nuclear deal and the opacities it has spawned in an area already beset by constant turmoil for more than a decade.
(The writer is former finance secretary) [email protected]
