The back-to-back release of central bank’s monetary policy statement and the two quarterly national economy review reports reveal two major threats to macro economy. These are: a) the quasi-hijacking of the effectiveness of monetary policies by fiscal managers, and b) the economy’s slippery slope to debt-deficit spiral.
Keeping up with the trends in first half FY13, the fiscal authority borrowed Rs.853 billion from the banking system during 9MFY13 against a full-year estimate of Rs.484 billion for FY13. Such high level of borrowings kept an upward pressure on the market liquidity and interest rates while limiting growth in private sector credit.
The central bank has been working its way around the injury by providing liquidity through short-term Open Market Operations (OMOs). However, unless the issue of untargeted subsidies and other inefficient expenditures are clipped and meaningful tax reforms are rolled out, the source of the problem will not be resolved.
The State Bank has been cautioning against these kinds of root problems for many years now, and the two quarterly reports released late last are not different in that sense. What is different is that, what is once called a potential threat is now termed a looming threat.
By the end of first quarter current fiscal year, interest payments made up for more than 38 percent of overall current spending, compared to 27 percent in first quarter FY12. The resulting lack of fiscal space is undermining the government’s ability to revive economic growth.
“Our concerns regarding the looming debt trap stays, as the government domestic debt has increased by Rs.482 billion in Q1-FY13, compared to Rs.208 billion in Q1-FY12,” the SBP said in its first quarter report.
Contrast this statement with SBP’s comment on the same issue in the second quarter report: The “rise signals the growing unsustainability of the fiscal account, with the ‘increased risk’ of entering a debt-deficit spiral,” SBP said while referring domestic interest payments which increased from 22.2 percent of the current expenditure in 1HFY11 to 26.0 percent in 1HFY12, to 27 percent in first quarter FY12 and then to 29.5 percent in 1HFY13.
Given the absence of expenditure rationalisation and taxation reforms, the economy can be expected to live under fiscal fears.
Annual target for tax collection has become more challenging – not only because of lack of new tax measures in the FY13 Budget or a host of tax exemptions and leakages but also because of a sluggish formal economy and a reduction in imports.
Federal tax revenue collection grew by just 8.6 percent in 1HFY13 compared to 25 percent in the corresponding period of last year. First half tax collection, therefore, is 38.6 percent of the annual target, as against the historical trend 44.4 percent.
This means that the recently revised downward tax revenue target of Rs.2,191 billion “may also be challenging”.
There is one breather by the provincial governments which showed a joint fiscal surplus of Rs.96.5 billion in 1HFY13 against a full year target of Rs.80 billion. However, one cannot expect this additional provincial fiscal surplus to be left unutilised in the remaining year.
Given that and the fact that no further CSF inflows are in the pipeline for the rest of the year, SBP terms the meeting of annual budget deficit target of 4.7 percent of GDP as “very unlikely”.
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TAX AND NON-TAX REVENUES - H1
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Rs billion % growth
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FY12 FY13 FY12 FY13
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Tax Revenue 904.6 1,012.7 25.4 12.0
Direct Taxes 312.9 331.3 30.9 5.9
Taxes on goods & services 439.3 446.0 29.3 1.5
Excise duty 53.7 53.8 -4.5 0.2
Sales Tax 385.7 392.2 36.0 1.7
Taxes on international trade 94.2 108.0 17.0 14.6
Other taxes 37.9 69.8 41.3 84.4
Petroleum Levy 20.3 57.6 -42.7 183.8
Non tax Revenue 230.6 449.1 -14.0 94.7
Interest and dividends 24.0 26.4 6.6 10.1
SBP profits 104.0 100.0 30.0 -3.8
Defence 4.6 176.8 -93.1 3,715.6
Dev. surcharge on Gas 8.9 7.6 -48.5 -15.3
Royalties 26.4 29.8 -0.7 12.8
Miscellaneous 62.7 108.6 14.7 73.2
Total Revenue 1,135.3 1,461.8 14.7 28.8
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Memorandum
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Federal Taxes 867.4 942.0 25.0 8.6
Provincial taxes 37.2 70.7 33.9 89.7
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Source: Ministry of Finance.
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