ISLAMABAD: Pakistan’s fiscal deficit rose to 2.6 per cent of GDP in the first seven (July-January) months of the current fiscal year compared to 2.3pc of last year as interest payments surged by 60pc, posing severe risks to debt sustainability and pressures on public finances.
Reporting this in its Monthly Economic Update and Outlook for March, the Ministry of Finance (MOF) expected inflation to be inching down and asked the government and the central bank to continue fiscal consolidation and prudent policy stance for sustainable economic recovery.
The report noted that bonanza from healthy petroleum levy through highest-ever rates, State Bank of Pakistan profits on the back of heavy interest rates, and better returns from corporate entities helped the primary account show a sizeable and higher-than-targeted surplus.
“Overall, in the first seven months of the current fiscal year, the fiscal deficit increased to 2.6pc of GDP (Rs2.721 trillion) against 2.3pc of GDP (Rs1.974tr) last year,” the MOF said, adding that the contained primary expenditures helped in improving the primary surplus to Rs1.939tr from Rs945 billion last year.
Ministry sees inflation decelerating to 22.5-23.5pc in March
Total expenditures increased by 49pc to Rs7.532 trillion during Jul-Jan FY2024, up from Rs5.058tr last year. Within total, “current spending rose by 45pc primarily due to a 60pc increase in markup payments during Jul-Jan FY2024. In contrast, the growth in non-mark-up current expenditures has been recorded at 26pc”, it said.
On the revenue side, the net federal revenues in these seven months grew by 57pc to Rs4.379tr from Rs2.798tr same period last year. “The sharp rise in revenues was fueled by a notable uptick in non-tax collection, which increased by 105pc to reach Rs2.140tr against Rs1.046tr last year.” The substantial increase in non-tax collection was attributed to higher receipts from markup (PSEs & others), dividends, SBP profit, royalties on oil/gas and petroleum levy.
The FBR’s net provisional tax collection increased by 30pc to Rs5.831tr from Rs4.494tr last year. The MOF attributed this to improved tax compliance, better enforcement, and economic activity. “However, rising expenditures owing to higher markup spending highlight the challenges posed by debt servicing obligations. Consequently, the fiscal deficit has been widened by 38pc during the first seven months of FY2024,” it added.
The report claimed that the measures to control non-mark-up expenditures had yielded positive results, leading to a further increase in the primary surplus during the period under review. “Despite improvement in the primary surplus, the widening fiscal deficit indicates a persistent pressure on public finances,” it put on record and required the government to remain highly committed to fiscal discipline through austerity measures and revenue mobilisation efforts to counter these challenges.
The MOF expected the inflation outlook for March and April at a moderate level owing mainly to the phenomenon of the high base effect, contributing to the moderation of inflationary pressures. Additionally, the global context plays a role in shaping inflation dynamics where price decreases were witnessed, primarily driven by decline in the price indices for cereals and vegetable oils. Considering these multifaceted factors, inflation is projected to hover around 22.5- 23.5pc in March 2024 and 21-22pc in April 2024.
The Monthly Economic Outlook for March also noted the agriculture sector outlook to be encouraging compared to last year based on the production of Kharif crops 2023 and sowing of wheat aligned with target in Rabi 2023-24. Also, the economic situation in the major export markets had improved. “Despite the domestic downside risks for the industrial sector, such as high input cost and high policy rate, the cyclical component of LSM recorded above the potential level for December and January of the ongoing fiscal year. This positive trend is expected to continue in the upcoming months and LSM will post a modest growth compared to FY2023.”
On the back of strong growth in agriculture, a recovery is also expected in large-scale manufacturing sector during the remaining months of the current fiscal year, the report said as the performance of high frequency indicators was also signaling growth prospects in the ongoing fiscal year. Besides this, external and fiscal sustainability was also contributing to economic revival as Pakistan and the IMF have reached a Staff-Level Agreement on the final review of $3 billion SBA to secure a $ 1.1 bn tranche in coming month.
Published in Dawn, March 30th, 2024
