It will need to come out of the box

First impressions, on seeing the amount of bank borrowings of Rs 586 billion in revised estimates for 2017-18 as per Table-6, Comparative Budgetary Position, within the "Budget In Brief" publication of the Government; we managed to make ends meet with that much low level of bank borrowing, wow, great job! And then doubt set in; if we only borrowed Rs 586 billion how could Central Government Debt as per State Bank of Pakistan increase from Rs 20,767 billion on 30 June 2017 to Rs 22,906 billion at the end of February 2018; can only wonder what it stands at today since the State Bank of Pakistan has stopped updating the data! So lets out of box the budget.
According to last year's (2017-18) "Budget in Brief" current expenditure on revenue account was planned to be restricted to Rs 3,764 billion; a challenging Rs 140 billion less than the year 2016-17. According to the revised estimates for 2017-18 recently released, the actual spending on revenue account is Rs 4,298 billion. So we have overspent.
Without getting into a detailed variance analysis of the overspent amount of Rs 534 billion, it can be asserted that the primary increase was on account of mark-up payments and foreign loan repayments. While reviewing the last year's Budget in Brief, it was curious that mark-up for 2017-18 was budgeted at roughly the same level as that of 2016-17 actual expenditure, despite the loan balances going up considerably during that year. Accordingly, the increase in actual spending on account of debt servicing from last year's estimates of Rs 305 billion was perhaps not very surprising. Since debt continues to rise, on the same principle, it is likely that estimates for 2018-19 may need to be revisited sooner than later.
Perhaps a bigger concern is that net Federal Revenue Receipts of Rs 2546 billion for the current year 2017-18, after adjusting for mark up received from State Owned Enterprises, barely cover the nation's debt servicing, inclusive of contingent liabilities, of Rs 2,169 billion; difference of a mere Rs 377 billion.
Essentially this suggests that all other expenditure, including defence, grants and transfers and running of government, as well as development expenditure were met through debt. This assumption is supported by a broad analysis of federal net capital receipts of Rs 594 billion which includes Ijara Sukuk Bonds and Treasury bill amounting to a consolidated total of Rs 463 billion. In substance, prize bonds of Rs 81 billion are pure debt as well. Moving on to receipts from external resources of Rs 1,229 billion; these include project loans, programme loans and other aid of Rs 1,204 which are all in the nature of the debt. Other aid because, Islamic Development Bank, commercial banks and investors of Sukuk Bonds are not in the business of giving aid.
Accordingly, the government this year borrowed Rs 2,253 billion which broadly ties up with the increase in debt discussed at the beginning. On the other hand considering there are still 4 months to go, as far as debt balance is concerned; Houston we may have a problem!
The coming year's estimate are not very different; even if the government is able to charge and recover additional envisaged levies on gas and petroleum of Rs 215 billion, which potentially will make up for most of the shortfall in tax collection on account reduction in tax rates, and Federal Board of Revenue is able to meet its much enhanced targets.
Against net adjusted Federal revenue receipts of Rs 2,947 billion for 2018-19, mark-up, foreign loan repayments and contingent liabilities are estimated at Rs 2,451 billion; a difference of Rs 496 billion. The risk is that this may even increase, considering the amount of outstanding debt this fiscal year closes at, or if last year is considered a benchmark for budgeting errors. On the same principle outlined above for 2017-18, the Government plans to borrow 2,501 billion to meet its expenditure next year in 2018-19. Effectively, similar to last year, further borrowing exceeds debt servicing.
Some side mentions. The central bank is doing much more than running the monetary policy and regulating banks; it seems to be contributing around Rs 260 billion annually to the Governments treasury on account of profits. Including military pensions, the defence of our borders will cost us Rs 1,360 billion. And nowhere does the budget mention paying off circular debt which according to some estimates floating around has reached Rs 1,000 billion.
The budget analysis above, perhaps better explains the need to announce the domestic amnesty. If each year our net federal collections on account of taxes are only sufficient to meet our debt servicing obligations, and every year we are borrowing more than we repay with interest, than the Government treasury surely needs additional funds from somewhere, and soon. If that does not happen, additional burden will continue to land on the masses in the form of regressive taxes, irrespective of promises of tax rate reduction. Going forward the Budget will need to come out of the box!
(The writer is a chartered accountant based in Islamabad. Email: [email protected])