BR Research

Fiscal Roundup: 9MFY20

There are some prints of COVID slowdown on the consolidated fiscal position during 9MFY20; the worst is yet to come
Published May 8, 2020

There are some prints of COVID slowdown on the consolidated fiscal position during 9MFY20; the worst is yet to come in the 4th quarter. Fiscal deficit stood at 3.8 percent in 9MFY20 as compared to 5 percent in the same period last year. In 3Q, the deficit stood at 1.6 percent (same as previous quarter and 2.3% in 3QFY19). There is primary surplus of Rs194 billion in 9MFY20 (deficit of Rs92bn in 3QFY20).

The decline in fiscal revenue (16% QoQ) due to COVID (and other reasons) is fully compensated by decline in expenditure (down by 12% QoQ), lowering the deficit marginally on quarterly basis. One reason for lower expenditure growth is due to accounting treatment of SBP stock of floating PIBs (Rs3.2 tn). Revenues are booked (through SBP profits) on accrual basis while the expenditure is on cash basis (adjusted six monthly). This will normalize in full year. Moreover, fourth quarter is going to be tough both due to declining revenues and increasing expenditure. Expectations for full year deficit are at 9-9.2 percent. The last time two consecutive years of deficits were recorded was in Zia’s era (FY86-88).

Consolidated revenues increased by 31 percent in 9MFY20. This is primarily due to extraordinary growth in non-tax revenues. This is due to one off telcos licensing fees and high SBP profits. The trend is not likely to continue and government has to look for tax revenues or to cut down fatty expenditure.  Tax revenues increased by 14 percent. FBR revenues are also up by 13 percent – too low from even revised target.

COVID has impacted FBR revenues growth in 3Q. These are down by 16 percent from previous quarter and up by 5 percent from the same quarter last year. Direct taxes are down 16 percent on quarterly basis. The story is similar for other FBR taxes heads. In 9MFY20, the worst hit is in custom duties - down by 7 percent while imports are down by 14.4 percent. The story of sales tax at import stage is similar. However, new taxes on domestic sales have resulted in sales tax growth of 18 percent.

Taxation from provinces is showing signs of slowdown too. The overall provincial taxes are down by 3 percent in 3QFY20. Toll has increased by 12 percent in 9MFY20. Sales tax on services are up by 20 percent in 9M while the increase is reduced to mere 4 percent in the 3Q.

Petroleum levy has grown by 40 percent in 9MFY20 to Rs198 billion; but is down by 17 percent in 3Q. Now with PL at RS30/liter (max budgetary limit) on diesel and Rs23.8/liter on petrol, its growth will be better in the last quarter. This number is not part of divisible pool and may help in meeting growing federal expense due to COVID.

Growth in non-tax revenues (not be shared with provinces) is the prime reason for lower deficit in 9M this year. The toll is up by 180 percent to Rs1,034 billion. On quarterly basis, the non-tax revenues are down by 21 percent. There is nothing from telcos licensing in the 3Q, and SBP profits are down by 13 percent. Nonetheless, SBP profits are up by 3.6 times to Rs636 billion in 9MFY20 compared to same period last year. The high growth in non-tax revenues have resulted in 62 percent increase in net fiscal revenues while the gross revenues are increased by 33 percent. This trend may not continue next year.

Total fiscal expenditure increased by 16 percent in 9MFY20. However, the number is down by 12 percent on quarterly basis. This is partially explained by not accruing PIBs interest cost accrual, and will be normalized by June. Debt servicing is down by 16 percent on quarterly basis and is up by 29 percent in 9M to Rs1.9 trillion. The 425bps cut in interest rates will take the toll down going forward. But around 30-35% correspondent cut will be in tax revenues on banking earnings on government papers.

In addition, return from SBP holding of floating PIBs (linked to T-bills) will also fall proportionate to rate cut, and SBP (after taking out its budgeted expense) shall pass on the benefit to government. Decline in SBP profits thus would be higher. Therefore, the impact of lower rates on fiscal balance is much less than what is claimed by many.

Defence expenditure growth is tamed at 4 percent in 9MFY20. In third quarter, defence expenditure is cut by 5 percent. That is a a good omen. Armed forces being more efficient should set an example for federal government machinery to work on lowering expenses. There are some signs of it. Barring (defence and debt), other current expenditure is down by 11 percent in 3QFY20 from previous quarter and up by 14 percent in the 9M.

Consolidated development grew by 14 percent in 9MFY20 and down by 6 percent in 3Q (from previous quarter). Federal PSDP is up by 26 percent in 9M, but in 3Q its down by 23 percent (QoQ). On the other hand, provinces spent 9 percent higher in 3Q versus than in 2Q and the growth of PSDP is 38 percent in 9M.

Federal fiscal deficit stood at Rs2,046 billion in 9MFY20 and its down by 7 percent YoY. The deficit stood at Rs760 billion in 3Q – down by 10 percent QoQ and 17 percent on yearly basis. Some fiscal consolidation (from expenditure side) is being observed in the 3Q. Provincial surpluses improved the picture further. Overall, provincial cash surplus stood at Rs343 billion in 9MFY20 and mere Rs20 billion in the 3Q.

The consolidated fiscal deficit stood at Rs1,686 billion (3.8% of GDP) in 9MFY20 and its standing at Rs691 billion in the 3Q.

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