While the resource-constrained federal government’s longstanding plans to offload its stake in highly-profitable oil companies seem far from materialization, the economic observers foresee the fiscal deficit widening beyond six per cent of the country’s Gross Domestic Product (GDP) by the end of FY2011-2012, a pre-election year. The cash-strapped government, however, is yet to take concrete steps on its last year’s plan to issue Secondary Public Offerings (SPOs) for the state-owned oil firms to bridge the fiscal gap. The democratically-elected PPP-led coalition government is believed to be, naturally, tending to spend more on the public sector development front to take political mileage on the eve of general election expected to be held in March next year. “Given 2012 a pre-election year with more expenditure to be incurred on account of subsidies and populous development plans of the government,” viewed Khurram Schehzad, Head of Research at InvestCap.
With much of the government’s revenues being eaten up by the servicing of domestic debts, of which only bank borrowings were calculated by the SBP at Rs818.505 billion during July-Feb 17, the development expenditure registered a growth of 11 per cent year-on-year (YoY) during the first half of current fiscal year, July-Dec FY12. The analyst said keeping 1H fiscal deficit in perspective, the country’s annualized fiscal deficit should settle around five per cent of the GDP. “However, it is bound to stretch beyond 6 per cent at least,” he warned.
Like India, the economic managers in Pakistan are also thinking of bridging this deficit through the sale of government’s stake in the oil companies, but have so far not been able to take practical steps. “Gov’t of Pakistan… has also planned SPOs since last year… however, no concrete development has taken place by far,” said Khurram. Analysing latest data of the Ministry of Finance on fiscal deficit for the period of 1HFY12, the analyst said the fiscal gap though contracted in 1HFY12, was set to go beyond six per cent in FY12.
As per the latest fiscal update, encouragingly, total revenues of the country stood at Rs1.14 trillion, showing a growth of 15 per cent YoY during 1HFY12, while total expenditures went up at a slightly lower pace of 13 per cent YoY during the same period, totaling Rs1.67 trillion, he said. “Resultantly, the total budget deficit stood at 2.5 per cent of GDP (or Rs533 billion) as against 2.3 per cent (Rs490 billion) recorded in 1HFY11.” He said dip in the second quarter of FY12’s deficit was almost flat both QoQ and YoY basis at 1.3 per cent of the GDP.
“The contraction in the budget deficit on YoY basis was primarily due to exclusion of the one-time circular debt-related TFC swap that was issued to banks in 2QFY12 for compensating energy sector companies against their ever-mounting payables and receivables,” Khurram said. The Term Finance Certificates (TFCs) worth Rs391 billion were converted into Pakistan Investment Bonds and Market Treasury Bills amid non-servicing. Thus, had these Rs391 billion been included, the budget deficit would have shot up to Rs923 billion, that accounts for 4.4 per cent of GDP. The analyst said the creation of a Special Purpose Vehicle of Power Holding Company Limited saved the government this time around as another TFC of Rs136 billion was already transferred to PHCL. The country’s tax revenues, he said, had shown a solid growth of 25 per cent YoY during the fist half, most of which was recorded during the second quarter.
“The Federal Board of Revenue’s hunt-down to increase tax revenues by fetching more taxpayers into the net seems to have yielded results as the direct tax portion has improved to 34 per cent in the tax revenue basket, from 31 per cent in the last quarter,” he said. On the other hand, the government’s total expenditures were escalated mainly through the duo of interest repayment, on mounting government debt, and defence operations, making up to 46 per cent of the total current expenditure (48 per cent in 2Q).
Khurram said rising portions of deficit financing from the domestic sources had jacked up the government’s debt servicing cost, accumulating to 94 per cent of the total financing, which was being locked in at higher domestic interest rates compared to external financing.
