Fiscal outcomes in H1FY25

The statistics on fiscal operations by the Federal and the Provincial governments have been released by the Ministry of Finance for the first six months of 2024-25. An examination of the summary reveals a substantial improvement in the state of public finances in the country compared to the outcome in the first half of 2023-24.

There has been a decline in the consolidated budget deficit from 2.3 percent of the GDP to 1.2 percent of the GDP. Further, the primary surplus has jumped up from 1.7 percent of the GDP to 2.9 percent of the GDP. There is need to identify the reasons for this big improvement.

Also, the good news is that a number of quantitative performance criteria and indicative targets for December 2024 in the IMF programme have been successfully met, as follows:

(i) Floor on primary surplus of Rs 2,877 billion. The actual primary surplus is Rs 3,603 billion.

(ii) Floor on the aggregate provincial cash surplus of the four provinces combined of Rs 750 billion. The actual provincial cash surplus is Rs 775 billion.

(iii) Floor on provincial tax revenues of Rs 376 billion, with the actual revenues significantly higher at Rs 443 billion.

There is one major indicative target which has not been met. This is with regard to FBR (Federal Board of Revenues) revenues. The floor for the first six months of revenue was Rs 6,009 billion. The actual collection is Rs 5,624 billion.

The performance of a number of other public finance targets could not be assessed due to absence of disaggregated information. There are, however, still some areas of concern, which are highlighted below:

First, the quantum jump in the primary surplus is due to the lump-sum transfer of profits by the SBP to the Federal government of Rs 2500 billion in the first quarter of 2024-25.

This is a quantum jump of 157 percent in relation to the transfer last year. The difference is Rs 1528 billion, equivalent to over 1.2 percent of the GDP. This implies an increase in the primary surplus of 1.2 percent of the GDP from 1.7 percent of the GDP in the first half of 2023-24 to 2.9 percent of the GDP in 2024-25.

The implication is that the extremely high interest rates added to the budget deficit and primary deficit with the quantum jump in debt servicing. There is now, with a time lag, a favorable impact of an extremely large SBP profits due to the hike in interest rates in inter-bank borrowings.

Turning to the financing side of the budget deficit, there is one worrying development. The net inflow of external borrowing has turned negative at minus Rs 79 billion.

This implies that the inflow of new loans, especially from multilaterals and bilaterals, has been less than the quantum of external debt repayment. This is in sharp contrast to large positive net external financing of Rs 608 billion in the first half of 2023-24.

The assumption in the federal budget for 2024-25 is that there will be a net external loan inflow of as much as Rs 666 billion. This decline in external financing may be of concern to the IMF.

The other area of concern is the shortfall of Rs 385 billion already in FBR revenues. The growth rate in the first six months has been 25.8 percent as compared to the targeted growth rate of 39.3 percent in the 2024-25 budget.

The biggest shortfall is in the customs duty and sales tax. Continuation of, more or less, the same growth rate of close to 26 percent in the second half of 2024-25 will yield FBR revenues for the year of Rs 11,730 billion. This will imply a large shortfall of Rs 1240 billion. The fundamental question is will the IMF ask for measures to close this gap?

There is some good news about the containment of expenditure. In particular, the budgeted growth rate in pensions for 2024-25 was 25.6 percent, in line with the escalation announced in the budget. The actual growth rate in the first six months is only 11.4 percent. Has there been some deferment of payments?

The other area where economy has been shown in expenditure is in subsidies. The budgeted growth rate for 2024-25 is 27.7 percent, whereas the actual growth rate is a negative 36.8 percent. Has the power sector, in particular, performed substantially better and reduced the need for financial support?

Turning to the performance of the provincial governments, there is need to appreciate that combined together they have met the two IMF programme targets for December, 2024, of tax revenues and cash surplus.

However, it appears that federal transfers to the four provincial governments have shown an exceptionally high growth rate of 37.1 percent. As compared to this the growth rate in the divisible pool of federal taxes has been 25.8 percent. This implies that an additional transfer of Rs 275 billion has been made for reasons which are not clear.

Finally, it is important that a clear choice has been made in favour of stabilisation rather than enhancing the growth potential of the economy. The federal government has opted for deficit containment by severely restricting the level of development spending. The actual expenditure on PSDP projects was only Rs 133 billion in the first six months of 2024-25, when the budgetary target for the year is as much as Rs 1400 billion.

Overall, the fiscal outcome in the first half of 2024-25 is mostly positive, especially with regard to generation of a very large primary surplus. There are inevitably some weak areas like the shortfall in FBR revenues which will need to be focused on.

Copyright Business Recorder, 2025