Fiscal blowout as deficit jumps to 5pc, revenues flat

May 22, 2019

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Third quarter fiscal deficit. — Soure: Ministry of Finance
Third quarter fiscal deficit. — Soure: Ministry of Finance

ISLAMABAD: In the Pakistan Tehreek-i-Insaf’s first year in office, the country’s fiscal deficit in first three quarters (July-March) of the current fiscal year peaked to five per cent of GDP as expenditures broke past records and revenue performance was the lowest almost in a decade.

Read: IMF sees sharp jump in fiscal deficit, debt

The details of fiscal operations released by the ministry of finance on Tuesday put the country’s nine-month total fiscal deficit at Rs1.922 trillion — the highest 3rd quarter deficit recorded in a decade, which is the time period for which data is maintained on the ministry’s website. It was Rs1.48tr in the same period last year.

All major fiscal indicators — both on expenditure and revenue side — showed a marked deterioration across the board. There appeared to be no control on runaway expenditures as revenue collection turned flat. The dismal outturn in the data will put more pressure on the government to show a strengthened revenue mobilisation effort, as well as a stronger will to contain expenditures in the budget that is expected to be announced in early June.

Defence and debt servicing remain fastest growing expenditure items

The data shows a sharp spike in the deficit in the third quarter, which runs from January to March 2019, of about Rs900bn or 2.3pc of GDP. The figure is only slightly smaller than the deficit of the first two quarters, running from July to December 2018, combined. For the first two quarters, the total deficit was Rs1.02tr or 2.7pc of GDP. The deficit jumped despite a steep fall of 34pc in development spending in the first nine months of the fiscal year.

The highest full year fiscal deficit since 2000 was recorded at 8pc in fiscal year 2012-13 and even that year, nine-month gap between revenue and expenditure had amounted to 4.4pc of GDP, according to the ministry of finance data.

Mark-up payments in first nine months this year were reported at 3.8pc of GDP — the highest since 2009 — compared to 3.4pc in the same period last year. In absolute terms, an amount of Rs1.459tr was spent on mark-up payments this year compared to significantly lower debt servicing of Rs1.172tr last year. Interest rates nearly doubled in this period and the rupee has seen a sharp devaluation as well. Both developments would raise mark-up costs for the government, in addition to fresh borrowing.

Defence spending picked up pace sharply in the third quarter, coming in at 2pc of GDP in nine months, when there is no precedent for defence spending going beyond 1.9pc of GDP even for the full year, in the past 11 years. For the full period running from July to March, defence spending rose by 24.1pc from last year, coming in at Rs774.8bn compared to Rs623.8bn in the same period last year.

Revenues have flattened out between July and March, presenting the government with its most serious challenge. Collections till March of 2019 came in at Rs3.583tr compared to Rs3.582tr in the same period last year. But it actually fell significantly to 9.3pc of GDP this year compared to 10.4pc of same period last year.

This meant that the government’s tax machinery showed negative performance both in terms of absolute numbers and as percentage of GDP, clear manifestation of about Rs350bn revenue shortfall. Under the IMF programme the government is hoping to accede to before the start of next fiscal year, raising revenues will be a big challenge.

Non-tax revenues in nine months of this year amounted to Rs421.6bn, significantly lower than last year’s Rs506bn. As such, the non-tax revenue amounted to 1.1pc of GDP compared to 1.5pc of GDP last year. Non-tax revenue to GDP ratio was the lowest since 2008-09.

Current expenditure on the other hand amounted to 12.5pc of GDP in nine months that was the highest since 2008-09. Last year current expenditure was reported at 11.8pc of GDP that was also the highest in a decade. In absolute numbers, the current expenditure amounted to Rs4.798 trillion compared to Rs4.075 trillion last year.

Development expenditure and net lending amounted to 1.8pc of GDP – the lowest since 2008-09. Last year, development expenditure and net lending had stood at 2.9pc of GDP. The data showed about Rs684bn spending on this count in first nine months of current year, about 32pc lower than last year’s Rs1.002 trillion.

Read: Govt projects 6.5-7pc fiscal deficit for 2018-19

Total expenditure on the other hand increased to 14.3pc of GDP in first nine months of current fiscal year. Other than last year’s total expenditure of 14.7pc of GDP in nine months, the nine month total expenditure has never gone beyond 14pc of GDP since 2008-09 for which data is available.

Total development expenditure in first nine months amounted to Rs656bn this year compared to Rs993bn of comparable period last year, down by 34pc.

Published in Dawn, May 22nd, 2019