Fiscal deficit all set to widen by 6.5% of GDP in FY13

Despite positives like the inflow of $ 1.8 billion from the United States in August this year under the long-withheld Coalition Support Fund (CSF), the country’s fiscal deficit for fiscal year 2012-13 is expected to swell by Rs 1.5 trillion or 6.5 percent of the Gross Domestic Product (GDP). The official quarterly data, however, shows that fiscal gap between the federal government’s revenues and expenditures during July-OctFY13 set at Rs 284 billion compared Rs 257 billion of the corresponding quarter last year.
Latest fiscal operation numbers released by Ministry of Finance (MoF) depict a relatively curtailed fiscal deficit in 1QFY13, thanks to the CSF.
The analysts believe that despite the subdued 1Q numbers, the full year fiscal deficit was likely to stand around at 6.5 percent. According to Topline analyst Nauman Khan, this would be on the back of a likely shortfall in tax revenue, higher subsidy outlay and higher development expenditures in the election year.
Khan said the full year numbers fare better than last year deficit of 8.4 percent but compares unfavorably with last 10 years and 20 years average of 5.1 percent and 5.6 percent, respectively.
“Further, with threats persistent on the external account, financing of fiscal deficit would remain a major concern for the policy makers, particularly in 2HFY13,” said the analyst.
As per the latest fiscal operation numbers, 93 percent growth in non-tax revenue in 1QFY13 helped the deficit to remain at 1.2 percent of GDP similar to the one registered in the same period last year. Receipts of $1.8 billion CSF stood out as the single largest factor in growth in non-tax revenue, he said.
Resultantly, the government’s total revenue increased by 30 percent to Rs 692 billion with 10 percent growth also witnessed in tax collections.
On the other side, total expenditure grew by 23 percent with 24 percent increase in current expenditure and 15 percent decline coming in development expenditure.
Digging in current expenditure, the increase came primarily from 76 percent increase in debt servicing, while 82 percent increase was witnessed in general public services (this includes subsidy payments).
Disbursement in Public Sector Development Program expenditure declined by 15 percent, during 1QFY13
“With elections around the corner, we anticipate increase in the fiscal slippages in the coming months. In our base case, we estimate revenue shortfall of approx. Rs150-200 billion (though we have not incorporated the effect of tax amnesty scheme), while we estimate subsidy head to cross Rs350 billion this year. Furthermore, we foresee little chance of cut in the PSDP as it is a potent tool to gear up for next elections,” Khan said.
Though worrisome, the analyst said, the major threat comes from financing of fiscal deficit with pressure existing on the external front.
“We expect the onus of financing the deficit will squarely fall on the domestic sources as witnessed in the 1Q. Of Rs284 billion net financing requirement, Rs285 billion was provided by domestic sources while foreign financing stood at (-ve) Rs1.5 billion,” Khan said.
The material change in his estimate, Khan said, may come from another round of CSF receipts, implementation of tax amnesty scheme. On the other hand, another round of one-off payment in lieu of circular debt can further increase the deficit,” said he.
Abdul Azeem, an analyst at InvestCap Research, also sees the fiscal deficit clocking in at 6.5 percent during FY13.
“As per latest fiscal figures, total deficit during 1QFY13 of Pakistan didn’t show any signs of recovery as it stagnant at 1.2 percent of GDP as compared to same period last year,” he said.
However, in absolute terms, the deficit went up by 10 percentYoY to Rs284 billion from last year’s level of Rs257 billion. An initial insight would reveal that the revenue head rose by 30 percentYoY (Rs158 billion) in absolute terms to 692 billion as compared to last year of Rs534 billion.
Similarly, expenditure grew by 23 percentYoY (Rs185 billion) to Rs976 billion as compared the corresponding period last year, that’s why the budget deficit still at 1.2 percent of GDP during 1QFY13. Both direct and indirect taxes are showing reasonable improvement, with sales tax registering growth of 8 percentYoY in absolute terms, as its bracket was expanded despite stable rate.
However, in real terms tax collection still stays 1.9 percent of GDP same levels as compared to last year, meanwhile direct tax-GDP also remained at 0.6 percent of GDP.
“We therefore believe that evidence of real growth in taxes is still lacking and only a handful of head was defence services which can be seen outperforming as the US collation support fund improved the amount of this head to Rs107 billion,” said Abdul Azeem.
Another notable rise was seen in the collection of Gas Infrastructure Development Cess (Cess) and Petroleum Levy (PL), where cess collection was witnessed at Rs8.6 billion and PL to Rs22.8 billion during 1QFY13.
The cash-strapped government, he said, was heavily relying on domestic sources, mainly the banks, to fund the deficit during the first quarter during which the said sources provided liquidity worth Rs285 billion compared to Rs262 billion in the same period last year.