The consolidated fiscal deficit stood at Rs1.1 trillion (2.5% of GDP) in the 1HFY21 – up by 14 percent from Rs995 billion (2.3% of GDP) in the same period last year. The primary fiscal balance stood at Rs337 billion (0.7% of GDP) – highest surplus in the first half in terms of GDP since 1HFY04. This implies that effectively, government debt is falling. However, the cost of servicing debt is increasing despite the significant decline in the SBP policy rate – it’s up by 15 percent to Rs1.46 trillion in Jul-Dec 2020.
The consolidated fiscal revenues are up by 4 percent in the 1HFY21 to Rs3.35 trillion. The overall tax revenues remained almost unchanged – marginally down by 0.4 percent. Within it, the federal tax revenues are down by 2 percent while the provincial revenues are up 15 percent. The non-tax revenues are up by 17 percent – this increase is due to the inclusion of petroleum and gas levies into the non-tax revenues. Earlier, these levies were reported as other tax revenues. Barring these, the non-tax revenues are down by 22 percent.
Consolidated (federal and provincial combined) expenditure is up by 6 percent to Rs4.5 trillion. The current expenditure is up by 8 percent to Rs4.0 trillion – main culprit is debt servicing up by 15 percent; while defense expenditure is down by 8 percent. Provinces are spending more on as their current expenditure is up by 12 percent while the federal counterpart is up by 7 percent. The debt servicing is the single biggest element within federal at 52 percent of total.
There is not much room for federal to curtail and the deficit cannot be controlled without having provinces on board. Nonetheless, the provinces are showing a budget surplus at Rs 255 billion in 1HFY21. This is down by 27 percent from previous year corresponding surplus of Rs348 billion.
The federal government hands are tight. The high amount of debt is not giving any space for the development spending. It is not giving them room to rationalize tax rates. 76 percent of the net federal tax revenues in Jul-Dec 2020 spent on debt servicing. The ratio reaches 103 percent after incorporating defense expenditure. Add pension expenditure, the ratio arrives at 115 percent. This means that government has to take debt to serve these sticky expenditures. Nothing is left in improving government service delivery – by giving higher wages to its employees and to spend on the development. That is some debt trap economists commonly refer to.
The problem is of debt servicing, and within it its domestic debt servicing. Against the common belief that lowering the SBP policy rate will save Rs300 billion or so in the debt servicing, the number is increasing even after the decline in rates. Many used to say that rates were kept high to entertain the so-called hot money. But the sticky higher domestic debt servicing is due to issuance of PIBs at peaking rates in 2019. Virtually, all the PIBs are bought by local banks and non-banks. Hot money was primarily in T-Bills. Even today, after the SBP announcement of forward guidance, the T-bills and PIBs rates are moving up- local banks are driving the rates as these are the prime buyers.
Having said that, the domestic debt servicing (up by 21% in 1HFY21) will slowly start tapering off. With T-Bills issued at peaking rates are maturing; the cost is falling. In the 1QFY21, the domestic debt servicing was up whopping 44 percent and the tapered off to 7 percent in 2QFY21. This implies, the moving forward the domestic debt servicing to fall further. The foreign debt servicing is down by 26 percent in the 1HFY21.
One way to lower the debt impact is to enhance the revenues – mainly taxes. The best possible way to do so is by enhancing the economic growth. There are signs of economic recovery, and this may help in boosting revenues. In the 1HFY21, petroleum levy is the savior – government collected Rs275 billion – twice the amount in the last year. Thanks, to low oil prices which enabled the government to fully utilize the permissible limit of Rs30 per liter. Since this levy is not part of federal divisible pool, it helps to curtail the primary fiscal deficit. However, with all prices moving up, lately government is foregoing the potential revenue by not fully passing on the impact to consumers.
FBR taxes are up by 6 percent – considering COVID, it’s a decent growth; but not enough. The direct taxes are up by 6 percent and the sales tax on goods are up by 7 percent. Custom duties and FED grew by 3 percent and 1 percent respectively as government is rationalizing on the imports tariff and generally imports were low in the IHFY21. In the second half, imports are picking up and that would bode well for the majority of direct and indirect taxes collected at imported stage.
The provinces taxes are showing some decent growth- especially in GST on services- up by 28 percent to Rs141 billion. The growth is mainly emanating from Punjab where GST collection is up by 45 percent. This is despite the fact that Punjab has lowered the GST rates to 5 percent for restaurants on cards payment. Punjab have yielded good results in GST from telecom. However, there is a decline of 24 percent in stamp duty collection as rates are being rationalized- down by 36 percent to Rs18 billion as the rate is reduced from 5 percent to 1 percent – the decline in collection is less; this implies that there is better coverage of it.
Within federal non-tax revenues (apart from petroleum and gas levies), there is a decline of 22 percent. The decline is across the board – SBP profits are down by 13 percent to Rs373 billion. The PTA profits are down by 83 percent as there is no new auction of spectrum. There is decline in PSE profits as circular debt is further choking the dividend paying capacity.
On the expenditure front, the limitations of federal government to spend on development is described above. The federal PSDP spending is down by 16 percent to Rs232 billion. The provincial development spending is up by 4 percent to Rs232 billion – highest increase is in the KP exhibiting a growth of 64 percent to Rs41 billion.
The overall federal fiscal deficit is up by 8 percent to Rs1.39 trillion in 1HfY21. After incorporating, the provincial surplus of Rs255 billion, the consolidated deficit stood at Rs1.14 trillion– up by 14 percent. The problem is in financing – external financing Is drying up – down by 12 percent. The domestic financing is up by 42 percent to Rs684 billion. Within it, 81 percent is supplied by domestic banking sources. There is net injection money market. That is driving the market rates up despite SBP’s forward guidance – banks are the driving seat.