Economist spells out reasons behind rise in H1FY17 fiscal deficit

The increase in fiscal deficit by Rs300 billion during the first six months of 2016-17 as compared to the corresponding period of last fiscal year is extremely worrying because it reflected a 55 percent growth during first six months as compared to same period last fiscal year.
This was stated by Dr Hafeez Pasha while speaking at Aaj TV programme "Paisa Bolta Hai" with Anjum Ibrahim, here on Sunday.
"This sharp increase in the fiscal deficit has happened for the first time in our economic history," said Dr Pasha, adding that the main reason behind it is a decrease in federal and provincial revenues of the country and that revenues declined due to a decrease in non-tax revenue by 30-35 percent.
He said that the positive side is that the government has tried to check growth in the current expenditure which rose by only 5 percent. He said at the federal level, the growth of current expenditure is only 2 percent but the actual problem being faced by the government is less growth in revenues.
When it was pointed out that releases under the Public Sector Development Programme (PSDP) for road projects under National Highway Authority (NHA) far outpaced disbursements for water and power - to the tune of nearly 60 percent compared to 22 percent for water projects and around 26 percent for power, he simply said that as roads were a major component of China-Pakistan Economic Corridor (CPEC) therefore the government may have thought it more appropriate to disburse budgeted funds for roads.
He further clarified that bulk of investment by public sector in the power sector is in improving transmission and distribution capacity.
"If we are trying to increase our generation capacity through CPEC, but not increasing transmission and capacity through PSDP, there would be a gap and capacity could not be fully utilized," he said, adding that implementation of the Water and Power projects is very slow under the PSDP and there is a need to increase the pace of implementation of such projects.
Dr Pasha said that most of the power sector projects are being setup in the private sector which is not part of PSDP. On the other hand, all highway projects are part of the PSDP. And most of the amount of Rs65 billion has come from China in this regard. We have to see the position of Foreign Direct Investment (FDI) in power sector. This would tell us how CPEC projects are being implemented in the country. FDI from China in power sector has declined by 50 percent during the first six months of 2016-17 as compared to the same period of last fiscal year.
"On one side we are talking about CPEC projects, but on the other hand the implementation of the CPEC projects is very slow. As per data of the SBP, the import of power generation machinery has dropped that is hardly $500 million worth of the import of the said item that took place. We have to ensure speedy work on the CPEC projects which is presently not taking place," he urged.
Dr Pasha said that there was a visible decrease in foreign exchange reserves during the three months after October 2016. Mainly, factors responsible for depleting foreign exchange reserves are (i) no increase in exports, (ii) decrease in foreign remittances, and (iii) only marginal increase in foreign direct investment as compared to expected increase.
He said that the flow of bilateral and multilateral assistance - which extend concessional lending to the government - has decreased and government is relying on Sukuk bonds and short-term commercial borrowing. This has fundamental implications. In future, their repayment liability and cost would be more. He said that the position of the balance of payment has been affected during the last 3 to 4 months and there is a disturbing change in the balance of payment position during this period.
"Government should give priority to enhance exports. A package has been announced for the exporters but the package is not as strong as it should be, he said, adding that on the other hand, Pakistani currency has become overvalued due to increase in dollar value andthere is a substantial increase in imports as importers are opening LCs in a hurry keeping in mind the deteriorating balance of payment position.
Dr Pasha proposed that on the side of foreign trade, the government should strengthen the export incentive package and broaden it. While bringing more items under the export incentive package, the import margin requirements of credit should be increased and regulatory duties be imposed. The government should at any cost reduce the trade deficit and improve the balance of payment position to reduce overall deficit of the country, he urged stressing that the gap should not be increased as a time would come when the government would not be in a position to borrow.
"If imports are not checked through measures by adjusting the value of rupee and possible increase in import margin requirements in the form of duties on some non-essential items, the current account deficit would reach up to $7billion," he said, adding that the external financing requirements in 2016-17 would reach 13 billion dollars which would have an impact on reserves leading to more complications.
He said that at present the government has entered into the election mode, and there would be an increase in the expenditure. There was an agriculture package, export package and concessions in different areas and new projects are being inaugurated, and there is a danger that in the next budget the expenditure side would further increase and fiscal deficit would widen next fiscal year. He said that if the deficit is 2.4 percent of the GDP during the first six months of 2016-17, the deficit for the whole year would end up at 6 percent, he maintained. Target for the current year is 3.8 percent of GDP and government deficit would be Rs700 billion more.
He said that presently, borrowing is done by SBP by printing currency and around rupees 900 billion have been printed which has a negative impact on inflation. He emphasised that the government has to take measures to mobilise more revenue especially non-tax revenue, because 30-35 percent in non-tax revenue is alarming.
At the time of budget, the government projected Rs170 billion from the coalition support fund (CSF) by the USA government but Pakistan got nothing in this head and this is another major reason for the rise in the fiscal deficit.
"It is surprising to note that dividend income for government is much less but the stock market is booming which is simply not understandable. At the same time, SBP profits are getting less but the government is continuously borrowing from the SBP and ultimately the profits would go back to the government," he said.
Hafeez Pasha further said that statistical discrepancy for the last three years is around Rs500 billion, which is a record and indicate that financial management and accounting systems are not working as well as they should. He said that such a big statistical discrepancy is not justified and last fiscal years statistical discrepancy of Rs8 billion increased by the end of fiscal year to Rs200 billion. So, there is danger that statistical discrepancy will increase this year as well. He said maximum statistical error for the entire fiscal year should be Rs40 to Rs50 billion, a number which has already been surpassed. This reflects poorly on financial matters, he maintained.
"Surprisingly, revenue transfer from federal government to provinces has declined which means the federal government has held back provincial share to show a lower deficit than the factual deficit," he said, adding that provincial surplus is Rs90 billion during the first six months of the current year and the budgeted Rs339 billion for the year is impossible to generate especially as the government is already in election mode.