The consolidated fiscal deficit stood at Rs1.65 trillion (3.6% of GDP) in 9MFY21 as compared to Rs1.69 (3.8% of GDP) in the same period last year. Higher provincial surplus (Rs 413 Bn against Rs394 Bn same period last year) and curtailed expenditure (other than debt servicing) have contributed towards limiting the deficit – especially, the primary fiscal balance – showing a surplus of Rs452 Bn (1% of GDP) against Rs194 Bn (0.4% of GDP) in the same period last year.
The reason for achieving higher primary fiscal surplus is the brakes put on the development spending – consolidated (provinces and federal combined) at Rs723 Bn (1.6% of GDP). This is a third straight year of low development spending and it is the third year of PTI government. In the last year of PMLN development spending peaked at Rs1.0 trillion (2.9% of GDP) in 9MFY18.
PTI government is now moving away from stabilization to pro-growth policies and one of the arsenal new FM has is to spur development expenditure. But that would have a bearing on fiscal deficit. The deficit was north of 8 percent in the last two consecutive years. This trend is not sustainable. Analysts expect FY21’s deficit at 7-7.5 percent of GDP. Next year, it must come down to below 6 percent. The new FM has no option but to boost revenues to compensate for higher development or to kick start projects in public private partnership mood. For that NAB’s fear code must be cracked.
The overall fiscal revenues are up by 6 percent to Rs4.99 trillion in 9MFY21. The tax revenues are up by 5 percent to Rs3.8 trillion and non -tax revenues are up by 12 percent to Rs1.2 trillion. Petroleum levy (PL) is now categorized as non-tax revenue – by including it in the tax revenues, the growth comes at 11 percent.
FBR tax revenues are up by 11.5 percent to Rs3.4 trillion. The direct taxes are up by 8.8 percent and these constitute 36 percent of FBR revenues. The growth in indirect taxes is higher as imports have started to pick up with some economic growth in sight. Customs duties and sales tax on goods both are up by 14 percent each in the 9MFY21 to Rs541 billion and Rs1.4 trillion, respectively.
Higher growth in FBR revenues is visible in the third quarter with 24.6 percent growth in Jan-Mar 21 over the same period last year. The revenues from customs duties are up by 39 percent – visible from imports growth of 30 percent in the same period. Better performance by LSM is being reflected in 15 percent growth in direct taxes and 30 percent increase in the GST on goods.
The growth in FBR taxes (apart from direct taxes) is positive in 3QFY21 as compared to the values in 2QFY21. However, the increase in COVID cases has forced the government to impose lockdowns (including long Eid holidays) in the ongoing quarter. This is going to impact the revenues growth and the government may miss lofty full year target. However, on year-on-year basis, the lockdowns in 4QFY21 is likely to be less economically devastating as was the case in the 4QFY20.
Non-tax revenues are bifurcated into PL and other non-tax revenues. PL is a star performer – collection is up by 82 percent to Rs369 billion. Since it is not shared with provinces, all the growth is being consumed by the federal government. The higher growth is due to low oil prices during the period – especially the 1HFY21. PL averaged at Rs137 billion in the first two quarters and it fell to Rs94 billion in the 3QFY21 as the oil prices started to move up and the government was reluctant to pass on the increase to the consumers. The trend is continuing in 4QFY21.
The story in other non-tax revenues is not rosy. The collection is down by 27 percent to Rs751 billion. SBP profits fell by 21 percent to Rs497 billion. That was bound to happen as SBP profits were at an extremely high level in the last year and some were due to one-time gains. The story of PTA profits is even dismal – down by 82 percent to mere Rs20 billion as there is no new spectrum auction.
Provincial taxes are up to Rs370 billion in 9MFY21. The growth of 15 percent year on year is better than FBR, but provincial tax revenues are mere 11 percent of what FBR collects. The main item within provincial domain is GST on services – collection is up by 24 percent to Rs211 billion – contributing 57 percent of provincial taxes.
Provincial revenue reliance is mainly on the federal transfer under the 7th NFC award – which received Rs1,985 Bn from the federal government and forms 77 percent of total provincial revenues. Not only provincial share from federal government is falling (from 82% in 9MFY17 to 77% in 9MFY21) but also the provincial surplus is growing (from Rs138 Bn in 9MFY17 to Rs413 Bn in 9MFY21). This implies that slowly provinces are sharing the consolidated fiscal burden. Of course, that does not come without a cost. With sticky current expenditure, the development spending is being slashed – from its peak of Rs578 billion in 9MFY18 (1.7% of GDP) to Rs390 billion (0.9%of GDP) in 9MFY21.
The consolidated expenditure in 9MFY21 is up by 4.2 percent to Rs6.64 trillion, and 91 percent of the expenditure are current – stranding at Rs6.1 trillion – up by 8.4 percent. One third (33%) of expenditure is done by provinces, 34.6 percent is on debt servicing, which leaves less than one third for all kind of remaining federal current expenditure.
The debt servicing stood at R2.1 trillion (4.6% of GDP) in 9MFY21 and is up by 12 percent compared to same period last year. Even though SBP’s policy rate is down from 13.25 percent to 7 percent. The reason for hike in expenditure is due to issuances of over Rs1 trillion in PIBs at peaking rate in 2019 and that expenditure is sticking around. The country is falling into a debt trap – the debt servicing cost (9M) grew at a CAGR of 18 percent in the past five years.
With this kind of debt servicing there is not much room left to spend anywhere else. Out of Rs4.23 trillion federal current expenditure 50 percent is being spent on debt servicing in 9MF21. Rs329 billion or 8 percent of current expenditure is spent on pensions for army and federal government employees. The defence expenditure is down by 2 percent to Rs784 billion (18.5% of the federal current expenditure).
The salary and other kind of current expenditure are kept in check. There is no increase as such. But in the upcoming year government has to give some increment to the federal employees and same would be the case for provinces. The story of development expenditure is dismal, and the government has all the plans to spend in the next two years.
The deficit was curtailed in 9MFY21 by slashing all the expenses where the government could. The story is about to change. The deficit control can only happen by jacking up tax revenues and lowering the debt servicing by issuing new bonds at lower rates once old (1Y to 3Y paper) expire.
The deficit financing has increasingly is falling on domestic sources. With no borrowing from SBP, the dependency is growing on commercial banks and these are getting liquidity injection through reverse open market operations – indirect borrowing from SBP. All that is shrinking the private sector credit further. The economic growth cannot come without growing private credit. The need is of enhancing the private credit by lowering fiscal deficit and curtailing its financing reliance on domestic banking sources. Tough job for Shaukat Tarin ahead.