The release of the summary of the consolidated federal and provincial budgetary operations 2019-20 for the first quarter (July-September) of the current year by the Finance Division has generated considerable concern amongst independent economists as well as the general public for two reasons. First, the disbursement for Public Sector Development Programme (PSDP) for the first quarter was only 8.8 percent of the budgeted total – 10 percent for federal PSDP (71.756 billion rupees was disbursed against the budgeted target of 701 billion rupees) and 7.7 percent for provincial PSDP (70.624 billion rupees disbursed against the budgeted amount of 912 billion rupees) though the amount released by each province was not identified. This is in spite of the 7 November 2019 memo issued by the Finance Division (budget wing) that stipulated that “funds for PSDP expenditure for each project shall be released at the level of 20 percent for Quarter 1, 30 percent each for Quarter 2 and 3 and 20 percent for Quarter 4 against budgeted allocation 2019-20.” And in case of any shortage of funds by the end of the fiscal year, the memo noted that “PSDP releases for the fourth quarter of financial year would require ways and means clearance from Finance Division.”
Given that the PSDP spearheads economic activity in the country, especially given the existing prohibitively high cost of borrowing - discount rate of 13.25 percent since July 2019 - the reduction in PSDP disbursements explains the associated decline in the growth rate.
And, secondly, with 11 percent of the budgeted grants released and no subsidies during the first quarter of 2019 - decisions that without doubt would have severe political repercussions on the Pakistan Tehrik-i-Insaaf (PTI) government - economic activity in the country remained severely constrained. The first quarter’s data also reveals that defence received only 21 percent of the budgeted total, and debt servicing 20 percent of the budgeted amount.
However, what is significant is that social protection received much less than what it should have been disbursed. Finance Ministry did not deem it prudent to slash disbursements for the Prime Minister’s signature Ehsaas programme which he is reportedly monitoring. Additionally, the impact of a decline in growth rate due to lower productivity, in the public and private sectors, is not having an impact on inflation (as our inflation remains hostage to an undervalued rupee particularly with respect to the high rupee cost of petroleum imports) and is fuelling unemployment across the board thereby pushing thousands of families below the poverty line. Thus, however high is the disbursement for social protection against the budgeted total and the rise in its allocation in the current year, the budgeted amount is too little for the rising number below the poverty line.
Revenue shortfall was around 18 percent of the budgeted total which was widely regarded as too ambitious and unrealistic, a charge that the Advisor to the Prime Minister on Finance Hafeez Sheikh appeared to acknowledge during his press briefings prompting him to add that the government would generate (i) 300 billion rupees from the privatisation proceeds (instead of the budgeted 150 billion rupees) though reports indicate that legal and administrative lacunae may stall the process till next year; and (ii) TA licence fee has generated an additional 20 billion rupees compared to what was budgeted – 72 billion rupees against the budgeted 52 billion rupees.
However, it is the State Bank of Pakistan (SBP) profits of 185 billion rupees in the first quarter that are considerably higher than the budgeted amount of 401 billion rupees for the entire year due to what authorities claim is cessation of borrowing from the SBP as per IMF conditionalities.
The overall budget imbalance for the first quarter was negative 442 billion rupees with external financing of 166.49 billion rupees and domestic of 308 billion rupees; however the government borrowed 67 billion rupees from banks with the remaining amount borrowed from non-banks. In the comparable period the year before bank borrowing was 291 billion rupees with non-bank borrowing estimated at 235.7 billion rupees.
One would urge the Prime Minister to look at the details of lower than budgeted disbursements and their likely impact on the economy when he hails the reduction in fiscal deficit.
