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The fiscal deficit is reported at 0.7 percent of GDP or Rs286 billion in the 1QFY20, and the interest payments are around Rs572 billion to make the primary surplus at reported Rs286 billion (0.7% of GDP) – well within the IMF target of allowance of primary deficit of Rs102 billion – the government has a comfortable cushion of Rs388 billion from the target. The official numbers are to be announced soon – here is an attempt to dissect deficit numbers.

The FBR revenues are reported at around Rs960-970 billion against the target of Rs1,071 (net of Rs75 billion clearance of refunds). But is there any refund? Not as such. The shortage is around RS175 billion; but still the deficit is well within the target. Higher non-tax revenues and low expenditure take the MoF home. On non-tax revenues, the SBP profits and licenses renewals of telcos have given the room.

The government has budgeted SBP profits of Rs406 billion for the full year and it seems the number is around Rs180-190 billon in the 1Q. That is a big booster, and some of this hike is attributed to booking of all the exchange loss in the last quarter of the previous fiscal as SBP booked a loss of Rs 126 billion in the 4QFY19.  The other reason for higher SBP profits is conversion of around Rs3.2 trillion of SBP stock of government debt from T-Bills to floating rate PIBs.

And the interesting point is that SBP has booked the profits on these PIBs whereas government does its accounting on cash basis and since the coupon payment is not due yet, the debt servicing will be booked in next quarter. That partially explains the low deficit in the 1QFY20, as SBP has booked profit from government on this debt and transferred that to the government while the cost in debt servicing of government is yet to be booked. This also explains that instead of higher interest rates amid increase in debt, the government debt servicing is at Rs572 billion in 1QFY20 versus Rs632 billion in the 4QFY19. This anomaly will be corrected in the 2Q, and that will put a pressure on deficit in the second quarter.

Similarly, the telco money in non-tax revenues is around Rs70 billion against full year budgeted amount of Rs55 billion. This number would surely be much lower in the 2Q. The pressure would be mounted on tax revenues in the quarters to come. The direct taxes target would be impossible to achieve full year target in a slowing down economy. The story of sales tax is not much different where the full year target is Rs2.1 trillion and the government may not get more than Rs400 billion in Jul-Sep. The good news is that the collection is higher on domestic sales while import compression is hurting sales tax at imported stage.

The other problem in the coming quarters is to keep expenditures within limits- consolidated current expenditure is said to be lower in the 1QFY20 at around Rs1.6 trillion whereas the toll was Rs1.48 trillion in the same period last year and Rs2.3 trillion in the 4QFY19. The sense is that in the last quarter, higher expenditure was booked to cover some of the expenses in the first quarter this year to make the picture better under the IMF programme – not a bad move as Fund targets are too stiff, anyways.

The consolidated PSDP release is probably around RS150 billion as against full year target of Rs1.66 trillion – there would be some slippage in deficit due to higher release as with time, pressure will be mounted on government to generate growth through spending.

The other element to point out is increasing government cash balance which is inflating the overall central government debt. The overall central government debt increased by Rs1.5 trillion in Jul-Sep to Rs34.24 trillion (78.6% of GDP) while the consolidated fiscal deficit is Rs286 billion – and the deficit is not to be much more by adding provincial surplus in it.

The higher increase in debt proportion to federal fiscal deficit is explained by significant increase in government cash position – increased by Rs1.7 trillion in just three months to Rs4.94 trillion as of September end. The ministry needs to explain why so much cash is accumulated in days of such high interest rates. More on fiscal numbers once the official numbers are out.