Fiscal report card – mixed bag

The official fiscal numbers are out. They are in line with what was covered last week. Tax revenues are shy of the target and non-tax revenues are overcompensating the shortfall – but the trend is not sustainable. The cushion on primary deficit in 1QFY20 (Rs388 bn – as surplus is Rs286bn versus deficit target of Rs102bn), will let the government pass the second (Dec) and perhaps third review (Mar), but fourth review would be a challenge – and for that tax revenues must go up. As per news reports, the FBR revenues are short by Rs224 billion to stand at Rs1.6 trillion in Jul-Nov. There is no way the government can reach Rs5.5 trillion target.

The FBR revenues stood at Rs946 billion in 1QFY20, out of which Rs356 billion are direct taxes. The FBR taxes grew by 16 percent as compared to same period last year, and the growth in direct taxes was 19 percent. This is good in a slowing down economy –inflation in the period is at 11.4 percent. There is a decline of 1 percent in custom duty as evident by import compression In sales tax, the growth of 14 percent is encouraging as probably all the growth is emanating from the domestic sales tax – documentation efforts are yielding some results, but it is a long road.

The juice is extracted from non-tax revenues, primarily higher SBP profits and telcos related flows. The SBP profits may remain high for the remaining year, but not much should be expected of telcos and other avenues. The issuance of Rs200 billion Sukuk for energy circular debt may improve the cash flow positon of government owned companies in the sector - expect higher dividends in quarters to come. The dividends from PSEs were a mere Rs1.7 billion in the 1QFY20 versus Rs60 billion in FY19.

On the expenditure front, the current expenditure increased by 7 percent year on year to stand at Rs1.6 trillion. The single biggest contributor is debt servicing – up 13 percent to Rs571 billion – but the number is 10 percent less than 4QFY19. The defence expenditure is up by 11 percent to Rs243 billion while the growth in all other expenditures is limited to 2 percent.

The good news is that despite all the mounting fiscal pressure, the development spending grew by 34 percent to Rs142 billion. There are projects in addition to these on public private partnership but the fear of NAB may keep the targets at bay – no one in bureaucracy is ready to sign anything where risk is involved as these days, bad decisions are equated with criminal intent in public accountability forums.

The provinces have shown a surplus of Rs202 billion and this number will lower in coming quarters as government has probably deployed the usual technique of transferring fund at the eleventh hour for provinces to not have time to spend. Last year, the provincial surplus was Rs247 billion and that amount was reduced to Rs139 billion for the full year. Expect a similar trend this year as well.

The interesting point is financing of the consolidated deficit. Out of Rs286 billion – 58 percent or Rs166 billion is financed from external sources and within the remaining domestic sources, non-bank financing stood at Rs246 billion and this has helped reduce the banking financing stock by Rs123 billion. Had the government not borrowed higher amount than what was needed (Rs1.3 tn) from SBP in the 4QFY19, there would have been no retirement of banking debt.

Out of full year fiscal deficit financing requirement target of Rs3,032 billion, Rs1,829 (60%) are kept from the external sector. Seeing the flows of foreign portfolio investment in government papers, achieving the target does not seem an issue. The good thing about foreign financing is that there will be less crowding out of private investment and this will bring room for private credit from banks- but for generating demand of private credit, interest rates have to come down.