In the first seven months of the current fiscal year, the federal government’s net borrowings from banks rose to Rs906.5 billion, up from Rs703bn in the same period of the last year, according to the State Bank of Pakistan (SBP).
Keeping this fact in mind, and keeping an eye on further borrowings in the next five months of the year, is important to form an idea of where the fiscal deficit for 2020-21 will end up. The fiscal deficit in July-December 2020 stood at Rs1.138 trillion — or 2.5 per cent of the total GDP of Rs45.567tr. And, almost half of this deficit — 48.4pc to be exact — was financed by the government’s bank borrowing of Rs551bn, the latest half-yearly fiscal report of the Ministry of Finance reveals.
Since July 2019, the government has stopped borrowing from the central bank and remained reliant on borrowing from commercial banks and non-bank sources, including saving schemes. Any change in the government’s commercial bank borrowing gives a clear idea of where the fiscal deficit is heading. An addition of Rs355.5bn (Rs906.5bn minus Rs551bn) in January 2021 alone indicates that the fiscal deficit is expanding fast. And, it is just in line with the trend. Every year, the fiscal deficit grows slowly in the first two quarters but picks up pace in the third quarter and reaches its peak in the fourth quarter.
Debt servicing in the first half of 2020-21 consumed three times more than the amount spent on defence. A larger amount will likely be spent on debt servicing in the second half
In addition to the government’s bank borrowing at the start of the third quarter, another thing is crucial to look at for projecting budget deficit financing. And that, of course, is tax revenue growth.
Tax revenues also tend to increase in the second half but the base provided in the first half indicates how much volumetric increase can be expected. In the first half of 2020-21, federal tax revenue totalled Rs2.21tr, according to the ministry’s fiscal operations’ report. The twice-lowered target for the full–fiscal year revenue collection is Rs4.963tr.
The government says the remaining amount of Rs2.753tr can be collected in the second half. In January, the Federal Board of Revenue’s (FBR) tax collection of Rs364bn showed a year-on-year increase of 12pc-plus.
The economic recovery in progress can help the FBR meet its full-year tax target. But that would help only a little in containing the fiscal deficit under the target of 7.5pc of GDP. Much depends on the government’s expenditures, including those on defence and debt servicing.
Keeping growing geostrategic compulsions in mind, it would be naïve to expect that full–fiscal year defence expenses can be brought below the budgeted level of Rs1.289tr. In the first half of the year, only about Rs486.6bn was spent on defence — and that means that in the second half Rs802.4bn should go to defence alone.
Debt servicing in the first half of 2020-21 consumed Rs1.475tr — or three times more than the amount spent on defence. In all likelihood, an equal — or even a larger amount — will go to this head in the second half. The budgeted estimate for full 2020-21 debt servicing is Rs2.946tr. Higher possible expenses, in the second half, on both defence and debt servicing could be compensated somewhat if the non-tax revenue target of Rs1.109tr for entire 2020-21 is surpassed by a big margin.
It seems the government will have no option but to breach its commercial bank borrowing target of Rs980bn for 2020-21
In the first half, the government earned non-tax revenue of Rs895bn — thanks mainly to profits earned by the SBP. Surpassing the full-year target now seems a possibility. Interest rates still remain low and the central bank has already said it “expects monetary policy settings to remain unchanged in the near term”. This means the government will not have to spend more than the targeted amount on debt servicing. And that, along with meeting the twice-lowered tax revenue target and surpassing the non-revenue target, could help keep the fiscal deficit at the targeted level of 7.5pc of GDP.
But that is tagged with a big ‘if’. What if the general administration expenses (i.e. total current expenses minus defence and debt servicing) rise abruptly in the second half? This possibility cannot be ignored. Politically challenged PTI recently came under immense pressure from hundreds of thousands of government employees for an immediate raise in wages. Besides, the government also seems eager to dole out generous development funds through elected representatives. This move can be blocked or deferred for the want of adequate legality. But the government employees’ demand for a raise had become too loud and noisy to be ignored.
Then, in the first half of 2020-21, the government failed to receive anything under the head of privatisation proceeds. And, it seems less likely to meet the full-year target of generating Rs500bn. Non-bank borrowing can help in fixing the fiscal deficit if it tends to rise beyond the target but one cannot expect a miracle happening there. In the first half, the government’s non-bank borrowing (primarily through national savings schemes) totalled Rs132bn. An addition of even an equal amount — and that by the way is not that easy under the present circumstances — could provide only a marginal relief to fiscal operations. With annualised overall consumer inflation in July-January 2020-21 still around 8.2pc, the rates of return on three- and five-year national savings schemes offer very little benefit to savers. Three-year special savings certificates, for example, yield only a 7.8pc return if they are redeemed between six months and two and a half years. Investors get 8.8pc return only on encashment of these certificates exactly after three years.
It seems the government will have no other option but to breach its commercial bank borrowing target of Rs980bn set for 2020-21 if it fails to contain current expenses — and more so if it fails to boost tax revenue.
Published in Dawn, The Business and Finance Weekly, February 15th, 2021