Fis­cal gap

The Pak Banker - - FRONT PAGE -

We are faced with the dilemma of twin deficit. Time and again, higher fis­cal deficit has led to high cur­rent ac­count deficit, and vice versa. Thus, to cur­tail cur­rent ac­count deficit, the fis­cal house has to be put in or­der first. It is rel­e­vant to note here that that dur­ing the ten­ure of the present PML- N gov­ern­ment, the fis­cal rev­enues have in­creased from 13.3 per­cent of GDP in FY2013 to 15.5 per­cent in FY2017. That is pri­mar­ily at­trib­uted to growth in tax rev­enues, from 9.3 per­cent of GDP in FY2013 to 11.6 per­cent in FY2017. But there is not much to talk about non- tax rev­enues, as pri­va­ti­za­tion, coali­tion sup­port fund and other non- tax rev­enues are hard to come by. On the ex­pen­di­ture side, the con­trol is vis­i­ble. Spend­ing equated to 21.5 per­cent of GDP in FY2013 and stood at 21.3 per­cent in FY2017. The fis­cal deficit was low­est in FY2016 at 4.6 per­cent, pri­mar­ily due to re­strict­ing ex­pen­di­tures to 19.9 per­cent while the rev­enues were grow­ing.

The ques­tion is: What can the gov­ern­ment do to con­trol the fis­cal deficit? The rev­enues are grow­ing; but the prob­lem is that half of the rev­enues are go­ing to the prov­inces af­ter the Sev­enth NFC awards. The debt-ser­vic­ing cost, on an aver­age, was 3.8 per­cent of GDP (FY2004-10) prior to the Sev­enth NFC award but it has now in­creased to 4.4 per­cent of GDP (FY2011-17). With the growth in both ex­ter­nal and do­mes­tic debt, along with cur­rency de­pre­ci­a­tion and hike in do­mes­tic in­ter­est rates, the ser­vic­ing cost may in­crease fur­ther. The fed­eral hands are tied when it comes to con­trol­ling debt ser­vic­ing. Sim­i­lar is the case with de­fence spend­ing and gen­eral ad­min­is­tra­tion ex­penses, although these are rel­a­tively de­clin­ing in terms of GDP.

In these cir­cum­stances, de­vel­op­ment ex­pen­di­ture is the only sec­tor the gov­ern­ment can tin­ker with. The PSDP was by far the high­est at 5 per­cent of GDP in FY2017 as com­pared to the aver­age of 3.4 per­cent of GDP in FY2002-16. The bulk of in­crease in PSDP came from prov­inces, which spent 2.7 per­cent of GDP on it in FY2017 ver­sus an aver­age of 1.5 per­cent in FY2002-16. And they may be in­clined to spend more in FY18 as prov­inces are sit­ting on ac­cu­mu­lated cash sur­plus close to the elec­tions.

Given this, how much of the tril­lion-ru­pee fed­eral PSDP can be trimmed? Not much in the given sit­u­a­tion but the next fed­eral gov­ern­ment ought to do so in FY19. But the main dilemma is how to put reins on pro­vin­cial spend­ing. Well, if IMF pro­gramme be­comes a re­al­ity, the fund may come up with a contingency fund con­di­tion for fed­eral gov­ern­ment from pro­vin­cial share. But it is eas­ier said than done, con­sid­er­ing po­lar­ized pro­vin­cial po­lit­i­cal re­al­i­ties. Apart from de­vel­op­ment ex­pen­di­ture, the grants and sub­si­dies can be thinned. The sub­si­dies were too high in FY2010-11 when elec­tric­ity re­lated sub­si­dies were steep. They were re­duced sub­se­quently ow­ing to clear­ance of cir­cu­lar debt and low oil prices.

Now oil prices are inch­ing up again, and power ca­pac­i­ties are adding to in­creased ca­pac­ity charges. Be­sides, im­ported RLNG, which is more ex­pen­sive than do­mes­tic gas, is in­creas­ing in the gas mix. At pre­vail­ing tar­iffs (both for elec­tric­ity and gas), the sub­si­dies ought to in­crease un­less tar­iffs are re­vised up. Thus, the main fis­cal chal­lenge for the new gov­ern­ment in FY2019 would be to cut de­vel­op­ment ex­pen­di­ture and raise en­ergy prices sub­stan­tially to con­trol fis­cal deficit and thus curb cur­rent ac­count deficit. But this would be at the cost of slow­ing the growth process spurred by en­hanced en­ergy at af­ford­able prices amid height­ened de­vel­op­ment spend­ing as of now.

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