Government fiscal deficit to jump 6 percent of GDP

LAHORE: Despite the fact that the government is introducing a variety of measures including flood tax, withdrawal of GST exemptions and expenditure cuts to curtail the rising deficit, the fiscal deficit will overshoot the 5.3 percent of GDP target agreed with the IMF and close in at the 6 percent mark, experts said.

Their view is supported by the recent tax collection numbers, as April revenue stood at Rs 127 billion, which has left the government with an ambitious target of Rs 437 billion for the remaining month of the fiscal year.

Economists said that Pakistan’s federal fiscal deficit checked in at 1.6 percent of GDP in 3Q (vs 1.5 percent last year), with the cumulative 9M number climbing to 4.5 percent of GDP. Although the provincial budget posted a surplus balance of Rs102 billion (vs surplus Rs 38 billion last year), the federal figure soared on account of rising current expenditure along with declining non-tax revenue. Total revenue in the cumulative phase rose 6.6 percent YoY to Rs 1.5trn, while expenditure jumped by a much higher 12.3 percent YoY to Rs 2.3trn leading the deficit to reach Rs 783 billion. As far as financing of the deficit was concerned, bulk of it remained skewed towards the domestic sources with Ijara Sukkuk, treasury securities and borrowing from the central bank being the main resources. Going forward, we view the deficit to cross the 5.3 percent target agreed with the IMF and come close to the 6 percent mark, despite the recent fiscal austerity measures taken by the government.

The hike in GST rates along with withdrawal of certain exemptions helped total revenue (tax + non tax) to augment 6.7 percent YoY and reach Rs 1.50trn. Of the break-up, the tax revenue rose 10.1 percent YoY to Rs 1.1trn, with taxation on goods and service (excise + stamp duty) and international trade growing by 13.1 percent and 14.3 percent, respectively from last year. We believe, while the former rose on account 1 percent hike in GST rate along with higher commodity prices in the period, the latter is likely to have jumped owing to higher import business. Non-tax related revenue on the other hand, declined by 2.5 percent YoY to Rs378 billion, as dividend income (on circular debt woes) as well as SBPIs profit, both posted sizeable YoY dips.

Total expenditure in 9M increased 12.4 percent YoY to Rs 2.3trn primarily on account of rising current expenditure, up 15.1 percent YoY to Rs 1.9trn. Higher servicing cost on domestic debt (up Rs 31 billion) & defence related expenditure (up 24 percent to Rs 335 billion), increased security related costs (up 35 percent) and rising economic affair expenses (up 48 percent to Rs 64 billion) remained prime reason. Due to escalating costs under this head, brunt of the cuts came under the head of development expenditures – down 3.1 percent to Rs 352 billion with PSDP lower by 14 percent YoY to Rs 247 billion.

With delay in release of funds under the Kerry-Lugar and reimbursement under the CSF, government has been reliant on internal sources to fund the deficit; with its share rising to 89.4 percent from 85.2 percent last year. Borrowing from the central bank (up 82.6 percent to Rs 316 billion), treasury securities (up 64 percent to Rs 158 billion) and Ijara Sukuk remained key internal sources.
Government fiscal deficit to jump 6 percent of GDP

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