KARACHI: Higher fiscal deficit, sharp decline in non-tax revenue and tax revenue much below expectations are serious challenges for the government willing to spur economic growth, the State Bank of Pakistan (SBP) said in its first-quarterly report for 2016-17 issued on Friday.

In terms of gross domestic product (GDP), the fiscal deficit during the July-September quarter stood at 1.3 per cent, the highest quarterly level since 2011-12, the SBP said.

Given the revenue shortfall during the quarter, achieving the annual fiscal deficit target of 3.8pc of GDP would be challenging and would require additional fiscal consolidation efforts on part of the government, it said.

The State Bank expects the current account deficit to remain in the range of 1pc to 2pc of GDP in the current fiscal year, which is higher than its earlier forecast of 0.5pc to 1.5pc.

More importantly, the deficit increased despite an exceptional growth in provincial surpluses, it said, adding that the major drag came from a sharp decline in non-tax revenues (mainly due to the absence of inflows under the Coalition Support Fund, drop in dividends from public sector enterprises, and lower profit from the SBP).

Tax revenues also remained well below expectations. On the expenditure side, the government was more prudent, as current spending registered a marginal decline. Development expenditures, on the other hand, increased 12.4pc year-on-year during the quarter, on top of the 47.4pc rise recorded in the first quarter of FY16.

State Bank’s initial assessment indicates that the economy is moving on its growth trajectory despite some challenges. Agriculture, sugarcane and maize harvests (accounting for 14.6pc of the crop sector) are expected to reach record levels in the current fiscal year.

Furthermore, though the cotton production missed the target of 14.1 million bales by a significant margin, it is still higher than the last year’s level.

However, lower production of rice compared to the last year and a decline in sowing area in the cotton belt of Punjab do raise some concerns. Specifically, rice production has remained below last year’s level — this was the third consecutive year when rice output recorded a year-on-year decline.

Similarly, the shortfall in cotton production, when compared to the target, is mainly due to a 20.8pc decline in area under the crop in Punjab. “This in itself was the result of low cotton prices at the time of sowing,” the SBP said.

Meanwhile, the government has been able to contain current expenses due to lower spending on subsidies. Interest payments, however, remained unchanged as the gains realised from low interest rates were largely offset by an accumulation of public debt stock.

On the other hand, the strong growth in development expenditure during the quarter was led by the provinces, as federal development spending dropped 7.6pc year-on-year in July-September. Most of the spending by provinces went to infrastructure improvement, followed by health and education.

The SBP said that overall stock of public debt increased by Rs866.1 billion in the July-September quarter, with over 85pc of the incremental debt contributed by government borrowings from domestic sources.

As for inflation, an uptick was already expected in the current fiscal year, the central bank said, adding that the recent revival of global oil prices after a global agreement on oil supply may lead to higher non-food inflation. On the other hand, food inflation may remain in check as the current stocks of staple food (wheat and rice) seem sufficient.

“On balance, therefore, the inflation is expected to remain within the target for the year,” the report said.

On large-scale manufacturing growth, which has been fairly low compared to the last year, the State Bank said it expects some pick-up in its pace on the back of continued supportive policies, like low interest rates, reduced cost of energy with improved availability, strong domestic demand, healthy corporate margins, and a conducive investment environment.

Published in Dawn, December 31st, 2016