ISLAMABAD: With the country’s fiscal deficit widening to 3.7 per cent of GDP in the first nine months of FY24, the Ministry of Finance (MoF) on Tuesday warned about the continuously increasing challenge of fiscal pressures driven by a massive 54pc surge in interest payments.

“A significant challenge arises from the growing pressure on expenditures, primarily driven by higher markup payments. This has caused the fiscal deficit to widen”, said the ministry in its Monthly Economic Update & Outlook for April.

On the same day, fiscal operations for the first three quarters (July-March) of 2023-24 showed that the deficit had widened to Rs3.9 trillion (3.7pc of GDP), almost 27pc higher than last year’s Rs3.078tr (3.6pc of GDP).

This was mainly because of a 54pc jump in interest payments to Rs5.52tr compared to Rs3.58tr in the same period last year. This meant the markup payments rose to 5.2pc of GDP by the end of March from 4.2pc last year.

Even then, the MoF claimed ‘some positive developments’ in the fiscal performance on the back of significant revenue growth but conceded that “growing pressure on expenditures due to higher markup payments presents significant challenges for fiscal management”.

At the same time, it appeared to be building ground for further stabilisation in the coming budget as part of the IMF programme, saying, “It is imperative to ensure fiscal consolidation, to lay the foundation for progressing towards higher and sustainable economic growth. Therefore, the government is stringently focusing on fiscal consolidation measures to ensure fiscal discipline.”

Nevertheless, mammoth windfalls arising out of record interest rates and the petroleum levy helped the government achieve a healthy primary surplus—the gap between revenues and expenditures, excluding interest payments. This was evident from a huge 162pc surge in the State Bank of Pakistan’s surplus profit to Rs972bn in nine months of the current year, compared to just Rs371bn in the comparable period last year.

Similarly, the petroleum levy jumped to Rs720bn in nine months—just short of the full-year target—showing an increase of 99pc over last year’s Rs362bn. Not surprisingly, the total non-tax revenue (NTR) surged to more than Rs2.52tr in nine months against Rs1.3tr of last year, up 91pc. “Consequently, the primary balance surplus continues to improve”, said the MoF and claimed that the overall “positive momentum in key indicators, coupled with prudent fiscal management, lays a strong basis for better growth prospects”.

The primary surplus amounted to Rs1.6tr (1.5pc of GDP) this year, up 217pc from Rs504bn.

The data showed that total revenue in the first nine months increased by 41pc to Rs9.78tr, while tax revenue rose by 29pc to Rs7.26tr. It included about 30pc growth in federal revenue to Rs6.7tr and around 19pc increase in provincial revenues to Rs551bn this year.

At the same time, the total expenditure surged by 37pc to Rs13.7tr by the end of March this year compared to just Rs10tr on the same date last year. Besides the 54pc increase in interest payments, defence expenditure also shot up by 22pc to Rs1.222tr against Rs1tr last year.

Therefore, as usual, the natural victim was the development sector at the cost of public welfare. Although total development expenditure in nine months this year rose 8pc in absolute numbers to Rs1.16tr, its share dropped to 1.1pc of GDP compared to 1.2pc last year.

Even federal development spending dropped to just Rs270bn this year, compared to Rs294bn during the same period last year.

On a positive note, the total revenue to GDP ratio improved to 9.2pc in nine months compared to 8.2pc last year, while tax revenue also inched up to 6.9pc of GDP against 6.6pc last year. A major spurt came in the form of non-tax revenue rising to 2.4pc of GDP against 1.6pc last year.

Published in Dawn, May 1st, 2024

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