Revenues are falling and are compensated by even bigger fall in expenditure to marginally shape up the deficit. Its a step towards fiscal consolidation. But its a long journey; and much is required to be fixed before the marginal improvement can be reaped in fiscal deficit to 4.3 percent of GDP in nine months of this fiscal year.
If things go as they are going currently and if history is any guide, fiscal deficit for the full year may stand at 5.7-6 percent of GDP compared to the budgeted 4 percent of GDP.
Tax revenues are stagnated at 6.5 percent of GDP in the three quarters of this fiscal. While the non-tax revenues have slipped by 50bps of GDP - and that is not a good omen. The blame goes to bad management on the auction of 3G licenses which failed to materialise for yet another year despite the strong urge of telcos to jump into the modern era. The bad negotiations with the principal of PTCL and poor coordination of Federation with provinces on settlement of the remaining chunk of PTCL privatisation proceeds resulted in yet another failure.
To add to the ado, the sour relations with the US on number of accounts are having an adverse impact on the fiscal balance as there were no releases from Coalition Support Fund and Kerry Lugar fund this year.
Almost half of governments non-tax revenues are emanating from its biggest lender on financing deficit, i.e., the SBP. More the government borrows from the central bank more the latter has interest earnings. It is circular in nature and creates rents in the form of inflation to all.
The austerity is visible with a reduction in current expenditure - from 11 to 10.2 percent of GDP. This builds the room for increase in development spending to 2 percent of GDP - still way below the good old days of the previous regime.
The elephant in the room is debt servicing which has eaten up virtually half of tax revenues. And the lions share is of domestic debt - its a double edged sword. Its servicing hikes up the cost of borrowing and further borrowing is used to service it and inflates the prices further. This is a cross subsidy - governments debt becomes cheaper by inflating all goods and services. Its a vicious cycle and can only be mitigated by enhancing revenues and curtailing expenditure further.
This problem can exacerbate with IMF payments getting bulky in the upcoming fiscal year; and can cause reserves depletion and currency depreciation. Another programme with the IMF seems inevitable and could well be with harsher conditions.
Nonetheless, this year at a glance appears better than the previous one, but as it happened in the past three years of this government, actual deficit is likely to overshoot by 40-50 percent. Mind you, this does not include the jugglery done by the Finance Ministry to take the twin circular debt into the government books without exhibiting it in the fiscal balance sheet. Taking this into account, the deficit can go as high as 7.5-8 percent of GDP.
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(Rs bn) 9MFY12 % of GDP 9MFY11 % of GDP
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Revenues
Total Revenue 1,739 8.3% 1,495 8.6%
Tax Revenue 1,372 6.5% 1,118 6.5%
Direct Taxes 470 2.2% 374 2.2%
Nontax Revenue 368 1.7% 378 2.2%
Expenditure
Total Expenditure (Booked) 2,582 12.3% 2,263 13.1%
Current Expenditure 2,154 10.2% 1,910 11.0%
Federal 1,479 7.0% 1,346 7.8%
Servicing of Debt 624 3.0% 507 2.9%
Defence Affairs and Service 348 1.7% 335 1.9%
Development Expenditure 421 2.0% 282 1.6%
PSDP 376 1.8% 247 1.4%
Budget Balance (895) 4.3% (783) -4.5%
Net External Inflow 47 0.2% 83 0.5%
Net Internal Inflow 847 4.0% 700 4.0%
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Source: SBP
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