Govt plugging the dam with a finger


Think-tank says govt met IMF targets through ‘creative’ accounting

Says govt able to show low fiscal debt by restricting funds transfers to defence establishment and provincial govts

Says deficit for 2015-16 is likely to be significantly larger than the projected 4.3 per cent of GDP

Institute for Policy Reforms, a think tank released a factsheet on Thursday titled Budgetary Outcome in First Quarter of 2015-16 of the Federal and Provincial Governments which claims continued existence of structural problems on the fiscal front.

The report also offers a look into the ways and means whereby the Ministry of Finance has tried to control the size of the consolidated fiscal deficit

According to the IPR factsheet, the fiscal deficit target agreed with the IMF was Rs 306 billion for the quarter. This has been exceeded by the relatively small amount of Rs 22 billion and, as such, a performance waiver may not be a problem. But how has this containment of the deficit been achieved?

Factsheet reveals that revenues have been below target by Rs 16 billion. Also, consolidated expenditure is only Rs 6 billion above the target in the IMF programme. Tax revenues have fallen short by Rs 32 billion, primarily of FBR. Non-tax revenues are somewhat larger, due to a big CSF inflow.

The success in managing expenditure is to be found partly in the policy of withholding releases. Defense expenditure was expected to rise by 12 per cent in 2015-16, especially in the presence of Zarb e Azb operations. But in the first quarter there is actually a decline of Rs 19 billion or 11 per cent. This has led to saving of Rs 39 billion. It is unlikely, however, that this cut will be permanent in character.

Further, releases to the provincial governments have also been withheld partially. Based on the revenues in the divisible pool and straight transfers, the total amount to be sent to the provinces during the quarter was Rs 367 billion. Instead, the transfer has been restricted to Rs 289 billion, a large shortfall of Rs 78 billion. The provinces have consequently been constrained in spending and have incurred a combined deficit of Rs 29 billion. This is in sharp contrast to the expectation that the provinces would be in surplus in 2015-16. Therefore, it appears that the federal government has given up on trying to restrain expenditure by the provincial governments. It has found it expedient to hold back transfers towards the end of the quarter and restrict expenditure that way.

The report says if transfers to the defense establishment and the provincial governments had not been restricted, the fiscal deficit for the quarter could have been higher by as much as Rs 117 billion. Instead of a deficit of 1.1 per cent of the GDP it would have been 1.5 per cent of the GDP. Based on past experience, the first quarter fiscal deficit is approximately 22 per cent of the annual deficit. On this basis, the projected deficit for 2015-16 may be significantly above the target of 4.3 per cent of the GDP.

According to the IPR factsheet, there is also a need to highlight some successes. The revenue growth of 12 per cent in FBR revenue is reasonable in light of the fact that the nominal GDP has grown at about half this rate. The problem lies more in the lack of realism of the annual revenue target growth of almost 20 per cent. Income tax revenues have performed particularly well with a growth rate of over 26 per cent. Sales tax revenues have declined somewhat in the presence of low oil and other prices, along with higher refunds. Provincial governments deserve a special commendation for the over 32 per cent growth in own-tax revenues, especially by the Sindh government.

The other positive feature is the sharp growth in PSDP spending of 57 per cent, especially at the federal level. However, the expenditure was still only 47 per cent of the releases to the Planning Commission up to the end of September 2015. There appears to be a growing problem of under-utilisation of funds by ministries/divisions and autonomous organizations in implementation of projects.

Factsheet pointed out two other problems that need to be highlighted. First, markup payments on debt continue to show growth of over 5 per cent, despite the sharp fall in interest rates. This is due to the ‘lock-in’ effect of sale of PIBs worth Rs 2.8 trillion in the last two years at relatively high rates of return. The Federal Budget 2015-16 envisages no growth in the cost of debt servicing. But if the trend of the last quarter persists then this will imply additional expenditure of over Rs 65 billion.

Second, the pattern of financing of the deficit is also very different from that in the corresponding quarter of 2014-15. Net external borrowing has increased significantly by Rs 69 billion, partly due to the sale of expensive Euro bonds.

Non-banking sources have contributed less, especially because of lower purchase of PIBs by almost Rs 100 billion. This implies that interest rates have probably bottomed out and may need to be raised. Borrowing from the commercial banks has been exceptionally high and the process of ‘crowding out’ of the private sector from credit continues.