Outgoing government leaves behind massive fiscal deficit

As the country is witnessing a historic democratic transition, the outgoing PPP-led government is expected to leave behind a legacy of external and internal borrowings eventuating into a huge fiscal deficit which will have to be dealt with by the caretaker regime and the next elected government.
The crises-hit country is poised to go for polls on May 11 to elect a new government that, according to economic observers, would be carrying a backbreaking fiscal pressure owing primarily to heavy government borrowings from the central and scheduled banks to cater to its ever increasing budgetary needs, particularly those related to running of the government.
“One could expect continued pressure carrying over to the new political setup and the primary task to be handled is to make a first step towards improving the root-cause of the overall economic issues,” said analysts at Arif Habib Research.
They said chances were dim for the fiscal budget deficit to stand in the range of 4.7 percent as targeted by the federal government in the current budget (FY13).
“With fiscal indicators not showing a rosy picture as the year unfolds, actual deficit could easily be higher- around 6.3% of the GDP- compared to our earlier expectations of 5.9%,” they added.
They further said despite tax reforms promised in the last few budgets, the government could not fully implement them and so far the tax revenue in the first half of FY13 stands at Rs 1.013 trillion- up 11.9% year-on-year (YoY).
The Federal Board of Revenue (FBR) presented two tax amnesty schemes; bringing tax evaders into the tax net and legalising smuggled vehicles at nominal rates. The latter has been implemented through an SRO, while the tax amnesty bill could not be presented in the outgoing National Assembly, thus fading away hopes for higher collections this year.
The FBR is now chasing the revised target of Rs 2.190 trillion.
“Our estimation for the tax revenue works out to be even lower at Rs 2.166 trillion, a marginal 5% growth YoY, excluding the 3G auction, Etisalat flows and tax amnesty estimates,” said analysts.
They added this should take the overall revenue to Rs 3.055 trillion in FY13; marking a 19% YoY increase.
On the spending side, the government’s budget outlays have already been superseded when it comes to current expenditure, in particular, subsidies.
The total expenditure is expected to outgrow the government’s target of Rs 2.960 trillion in the current fiscal year. “We estimate it to swell up to Rs 4.520 trillion by the end of FY13, a 15% YoY increase from last year’s Rs 3.936 trillion,” they said.
The power subsidy alone had been exhausted and was expected to easily cross the Rs 500 billion mark once again, they added.
On the developmental side, one can foresee higher spending with the PSDP released amount reaching Rs 185 billion in the first eight months of FY13.
“Bearing in mind that elections are around the corner, government spending is expected to go even higher,” believed analysts.
So far, IMF repayments and huge government borrowings have been the highlights of the current fiscal year, keeping the external financing balance in negative and bloating domestic financing. “However, by the end of FY13, we see external and domestic financing reaching Rs 61 billion (net of repayments) and Rs 1.423 trillion, respectively,” said some economic observers.
“This financing is exclusive of any further IMF loan as we do not see any loan agreement happening with the IMF soon, amid the political transition,” said analysts.
This may be the reason that the cash-strapped government is borrowing more cash from domestic sources, prominently the risk-averse banks.
On Wednesday, the federal government, through the State Bank of Pakistan (SBP), borrowed around Rs 121 billion from scheduled banks by auctioning short and medium term Treasury Bills at a cut-off yield of 9.4114 and 9.4280 percent, respectively. The ongoing political uncertainty and the resultant cautious attitude of investors barred them from bidding against the long-term T-bills as no bids were received by the central bank for the purchase of 12-month securities.
However, bidding against short and medium term papers amounted to Rs 140.147 billion (Rs 127 billion against 3-month and Rs 13 billion against 6-month government papers).
According to official figures, till March 8, the government borrowed a massive Rs 767 billion from banks.
Inflationary borrowings from the central bank ballooned by a gigantic 55 percent, week-on-week (WoW), to Rs 105 billion compared to a negative balance of Rs 143 billion in December, 2012. Borrowing from scheduled banks also witnessed an upward trend.
Consequently, monetary expansion in the country increased to 8.6 percent FYTD, marking a growth of 76 basis points, WoW, compared to the last quarter when the same grew by 162 basis points. “We attribute this upsurge to the massive increase in government borrowing,” said InvestCap analyst Muniba Saeed.
Going forward, the analyst said, the resource-constrained government’s need for borrowing would continue to exist for budgetary support. “However as SBP remains vigilant to any significant increase in cut-off yields, we expect the government to turn to SBP for funds in the absence of any significant participation from scheduled banks at low rates,” she said.
The analyst expected that in the event of non-materialisation of a Term Finance Certificate, issued to fund the prevailing circular debt crisis, coupled with a widening fiscal deficit, the government will continue its reliance on borrowing from the central or scheduled banks.