Fis­cal deficit

The Pak Banker - - FRONT PAGE -

There is bad news on the eco­nomic front. The cur­rent ac­count deficit stood at $1.6 bil­lion in Jan­uary - third high­est ever in our his­tory. The forex re­serves are de­plet­ing fast and the money raised by Eurobond/Sukuk in Dec has all evap­o­rated. The CA deficit for the first seven months of the cur­rent fis­cal year is es­ti­mated at $9.2 bil­lion (4.7% of GDP), up by 48 per­cent or $3 bil­lion year on year ba­sis. The main rea­son is the ris­ing vol­ume of im­ports which are un­stop­pable de­spite the cur­rency ad­just­ment in De­cem­ber. The bill was $4.9 bil­lion in Jan, the sec­ond high­est ever. The to­tal so far stands at $31 bil­lion, an in­crease of 18 per­cent on yearly ba­sis. The big­gest chal­lenge in the short to medium term is to slow down the run­away im­ports growth.

Ex­ports are up but they are too low to im­pact the cur­rent ac­count im­bal­ance. Ex­ports came in at $2.1 bil­lion in Jan­uary which is still short by $500 mil­lion from its peak in June 11.The trade deficit is still too high to tame CAD and at this pace, the CAD is likely to reach $16-17 bil­lion (4.8-5% of GDP). That is too high a num­ber and in­creases the gross fi­nanc­ing re­quire­ment for not let­ting the re­serves to come down any fur­ther. The good news is that Pak­istan has got three months' ex­ten­sion on FATF which gives an op­por­tu­nity for gov­ern­ment to raise some loans from global cap­i­tal mar­ket and short term fi­nanc­ing from com­mer­cial banks. The in­flows from west­ern mul­ti­lat­er­als (WB, ADB, IDB etc) are con­tin­gent upon IMF's let­ter of rec­om­men­da­tion. The Fund's post mon­i­tor­ing re­port was due in Feb and has now been shifted to the start of March.

The CAD may hover around the up­per band of re­vised tar­get of 4-5 per­cent of GDP while the fis­cal deficit is surely to be shy of 4.1 per­cent of GDP. There might not be much de­bate on in­fla­tion which may re­main in sin­gle dig­its even in FY19. The ques­tion is on the fate of fis­cal deficit as how would it im­pact the ex­ter­nal im­bal­ances and what are the aus­ter­ity mea­sures gov­ern­ment should take to con­trol the im­bal­ances. The con­sol­i­dated fis­cal deficit stood at 2.2 per­cent of GDP (Rs796bn) in the first half of the year as com­pared to 2.5 per­cent of GDP last year. The low fis­cal deficit in the sec­ond quar­ter is due to wel­come growth in rev­enues, es­pe­cially tax rev­enues and sur­pluses shown by prov­inces. Bar­ring pro­vin­cial sur­pluses, the federal fis­cal deficit stood at 2.6 per­cent of GDP. In FY17 the prov­inces shown com­bined deficit of Rs163 bil­lion ver­sus bud­geted sur­plus.

On tax rev­enue front, the gov­ern­ment is mak­ing progress. FBR tax col­lec­tion in­creased by 19 per­cent, while over­all tax rev­enues grew by 18 per­cent. The prob­lem is non-tax rev­enues where Rs300 bil­lon col­lec­tion in the first six months is around one-fourth of the yearly tar­get. Hence, the short­fall in non-tax rev­enues and surge in devel­op­ment ex­pen­di­ture would re­sult in slip­page in the fis­cal deficit from the tar­geted num­bers. The devel­op­ment spend­ing is grow­ing rapidly, up by 25 per­cent year-on-year, to reach Rs559 bil­lion. The federal gov­ern­ment has so far spent Rs248 bil­lion in the first half out of Rs1,001 bil­lion for the whole year. The gov­ern­ment would not be shy of spend­ing in the sec­ond half and that would ex­ert pres­sure not only on fis­cal deficit but on cur­rent ac­count as well. All said, fis­cal deficit is the root of the prob­lem which must be tack­led at all cost.

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