KARACHI, March 21: The State Bank says that fiscal deficit during the first half of the current fiscal year rose by Rs79.6 billion or 136 per cent year on year. It says that the deficit rose because of “a deceleration in revenue growth largely due to a freeze on domestic oil prices and acceleration in expenditures.

“This is also reflected in the overall fiscal balance indicators, all of which saw a visible deterioration,” says the second quarterly report of the central bank that covers economic developments in July-December 2004.

The report says that revenue receipts rose by a modest 11.8 per cent to reach Rs423.8 billion during the first half of the current fiscal year (H1-FY05). This relatively low growth was principally “due to 1.5 per cent decline in tax collection during the second quarter of the current fiscal year (Q2-FY05). The report says that the pace of growth in tax revenue collection slowed during H1-FY05 as the government received no petroleum development levy or PDL in five-and-a-half months from July to mid-December 2004. In fact, the government had stopped collecting PDL to freeze local prices of petroleum in the face of rising international prices in May last year. That explains why the government collected only Rs4.7 billion PDL in H1-FY05 down 80 per cent from Rs24.3 billion it had collected in H1-FY04.

During the first quarter of this fiscal year (Q1-FY05), the revenue shortfall because of deferment of PDL collection was covered by an exceptional increase in CBR tax receipts as strong non-tax revenue. “Unfortunately the buffer was not as strong in Q2-FY05.”

On the other hand, consolidated expenditure of the government during the first half of the current fiscal year rose to 503.8 billion, showing a year-on-year increase of 21.9 per cent. “As a result, total expenditures as a percentage of the GDP increased to 8.2 per cent in H1-FY05 compared to 7.6 per cent in the corresponding period last year.”

Similarly, development expenditures showed a strong 43.7 per cent rise, increasing its share in total expenditures from 13.8 per cent in H1-FY05 to 16.2 per cent in H1-FY05.

Also encouraging was the decline in the requirement for net lending to public sector enterprises, which fell to Rs4.7 billion as against Rs7 billion net lending in H1-FY04 mainly due to comparatively improved financial positions of PSEs. The report says that a comparatively improved position of Pakistan Steel, Wapda, KESC and Pakistan Railways led to 32.6 percent reduction in net lending to PSEs.

Unfortunately, these gains were more than offset by a sharp rise in current expenditures during the first half of this fiscal year, which jumped 21.3 per cent compared to a much smaller increase of 2.1pc in the same period of last year. “More specifically, federal expenditures (which account for about two-thirds of the total expenditure) recorded a 23.3pc increase year-on-year in July-December 2004 while provincial expenditures rose by a moderate 16.1 per cent.

Within the federal expenditures, defence expenditure grew by 15.8 per cent and debt servicing cost was up by 5.5 per cent.

“This increase in debt servicing entirely reflected the impact of rising rupee interest rates and a jump in the stock of domestic debt (especially arising from the substitution of expensive external debt).”

The SBP report says that about half of the H1-FY05 fiscal deficit financing requirement was met through external sources, reflecting higher disbursement by the Asian Development Bank and the World Bank.

In addition to utilizing the privatization proceeds of Rs6.1 billion realised through the sale of government shares in PIA, PPL, Falleti’s Hotel and Kohat Cement during Q1-FY05, the government borrowed Rs16.8 billion from the banking system during the entire H1-FY05.