Economy pins hopes of recovery on foreign fund inflows

The delay in fiscal support inflows from external sources including the US coalition fund and the FoDP commitments hasn only put development expenditure in doldrums but is also pressurizing currency. Worrisomely, a birds eye view on the recently released fiscal position for the first quarter FY10 shows the situation could be much gloomier ahead.
Owing to lower tax revenues amid higher current expenditure against the budgeted amount, the expenditure-revenue gap missed IMFs target by 0.2 percentage points. The fiscal managers attribute this slippage to the delay in US coalition support fund and advance salary for Eid paid in September. But going forward, the gap may widen beyond tolerable levels. Although, IMFs fourth tranche, including $350-$400 million for fiscal support, may not be delayed as feared by certain quarters, the non-materialization of foreign support funds will put pressure on external balance and currency while restricting the development expenditure substantially. This in turn will hurt growth prospects and the balance of resource allocation.
Lets now delve into the reasons of higher fiscal gap and outlook for coming quarters. The shortfall in revenues is the prime reason of fiscal slippage. The tax revenues were just eight percent higher over the same period last year, including the marginal fall in direct taxes, reflecting the brunt of economic slowdown. With this pace, its highly unlikely for FBR to achieve its budgeted target of Rs1.5 trillion for this fiscal year.
On the non-tax revenue front, higher transfer of SBP profits worth Rs70 billion (Rs 28 bn same period last year) led to the growth of 19 percent year-on-year. And it seems that higher dividend from public sector entities, especially from those in oil related business due to better oil prices, will keep the pace of non-tax revenues intact.
In contrast to revenues, current expenditures barring some non-provincial grants remained well in control - overall current expenditure grew by 14 percent year-on-year. Controlled debt servicing and defence expenditure at the time of war is a good omen. However, going forward, higher cost of debt servicing and the pressure on Pakistan by its western allies to make more efforts to wash out terrorism will increase current expenditure in coming quarters. The lack of external financing and lower growth in revenues have exerted enormous pressure on the government to cut the development expenditure. Although the development expenditure has almost doubled in the last quarter, low revenues amid absence of other financing avenues might result in substantial cut in PSDP this year. In the ongoing quarter, development expenditure is expected to remain within the vicinity of Rs60-70 billion compared to Rs132 billion in the year ago period.
The onus of financing all that fiscal spending, which resulted in the overall fiscal shortage of Rs224 billion (1.5% of GDP) in 1QFY10, was on the shoulders of non banking domestic sources, especially NSS. Out of Rs108 billion (Rs 27 billion last year) raised by non-bank domestic sources, Rs 63 billion were received from National Saving Schemes and Rs 48 billion from government securities. But with NSS rates likely to remain low in the near future, that burden will now be shared mostly by commercial banks - implying little room for private sector borrowers. In short, the story of Pakistans economy can move forward unless the government increases its revenues sharply, possibly after the introduction of VAT, and in the meanwhile, strives for more and more foreign investment.

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Fiscal Position (Rs bn)  Jul-Sep % of GDP Annualized % of GDP Budgeted % of GDP

                            09               FY10                FY10

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Tax Revenue                299     2.01      1195      8.06      1513     10.20

Direct taxes                84     0.57       336      2.27       557      3.76

Indirec taxes              203     1.37       814      5.49       956      6.44

Sales tax                  117     0.79       468      3.16       516      3.48

PDL                         24     0.16        96      0.65       122      0.82

Non Tax revenue            128     0.87       514      3.46       514      3.46

Dividends                   19     0.13        76      0.51        75      0.51

SBP profit                  70     0.47       280      1.89       150      1.01

Current Exp                521     3.51      2084     14.05      1699     11.45

General public service     265     1.79      1061      7.15      1189      8.01

Defence                     86     0.58       345      2.32       343      2.31

PSDP                        86     0.58       343      2.31       646      4.35

Financing                  205     1.38       820      5.53         0         0

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Source: Ministry of Finance