Yesterday, the ministry of finance reported the fiscal deficit number at 8.9 percent of GDP or Rs3.44 trillion. This space estimated the number at Rs3.49 or 9.1 percent of GDP (read ‘Scary fiscal deficit; don’t look at it”). The difference is in provincial surplus which was estimated at Rs59 billion versus reported Rs138 billion. This is an attempt to identify the cause of higher deficit in the 4QFY19- and why has it deviated by 1.7 percent of GDP from revised target of 7.2 percent of GDP.
The deficit of 3.9 percent of GDP in 4QFY19 is shockingly high. One prime reason for high deficit is that the SBP has reported loss of Rs126 billion in the quarter versus Rs90 billion profit in the same quarter last year. This is to book the exchange loss of the central bank. Had the profit of SBP been equal to last year quarter, the deficit would have been less by Rs216 billion or 0.56 percent to reduce the consolidated fiscal deficit to 8.34 percent of GDP. The deviation of SBP profits from revised estimates is Rs135 billion or 0.35 percent of GDP.
The other extraordinary hike is in current expenditure – adjusting to debt servicing which increased by 15 percent in 4QFY19 year-on-year. The defence expenditure in 4QFY19 is lower than same period last year; and full year defence expenditure is up by 11 percent in FY19. The abnormal and unexpected hike is in federal other current expenditures - up by 46 percent in 4QFY19 or 16 percent for full year. This could be due to some subsidies or spending on heads which IMF would not like, once in the programme.
Similarly, the way the government borrowed from the SBP in June to create a cushion for IMF targets for September, some expenditures would have deliberately overrun to create cushion for the programme. Had the other current expenditure growth remained at 9MFY19 level of 11 percent, the fiscal deficit would have been less by another Rs144 billion or 0.37 percent – the overall fiscal deficit – due to SBP loss and extra other current expenditure is ballooned by 0.93 percent – without these anatomies the deficit could have been capped at 8 percent of GDP.
The biggest increase in expenditure came in debt servicing – having increased by 40 percent in FY19. And we all know that is due to higher interest rates – a designed policy. The debt servicing cost came Rs104 billion higher than revised numbers and explains 0.27 percent of deficit deviation. The problematic issue was low FBR tax collection which came at Rs3.8 billion versus revised target of Rs4.1 billion – shortfall of Rs271 billion or 0.7 percent of GDP.
The primary deficit stood at 3.5 percent of GDP in FY19 versus 2.2 percent of GDP in the previous year. The target for next year is 0.6 percent of GDP. Normalization of SBP profits can give cushion of 0.5 percent of GDP. Similarly, 0.2-0.3 percent of GDP cushion will be available from normalization of other expenditure, but that will be eaten up by growth in defence expenditure.
The onus of the target will fall on revenues – mainly FBR. The target is Rs5.5 trillion and for that Rs1.65 trillion or 3.8 percent of GDP jump is required. That will be missed, but a cushion of 0.5 percent of GDP (due to SBP profits) will partially compensate it.