NationalVOLUME 16 ISSUE # 07

A mixed bag

Economic indicators during the first quarter of the current fiscal year show a mixed trend. Latest figures show tax revenue as a percentage of GDP is declining, mark-up has risen from 1.2pc of GDP in last year’s first quarter to over 1.6pc in July-September 2020, while domestic debt has risen by 170pc to R322.9 billion from Rs119.5 billion of the comparable period last year.

Pakistan’s budget deficit reached Rs484.3 billion (1.1 percent of GDP) during the first quarter of the current fiscal year. The country’s expenditures stood at Rs1.963 trillion as against the revenues of Rs1.479 trillion during the July-September period. The budget deficit, the gap between the government’s expenditure and revenues, was recorded at Rs484.3 billion (1.1pc of GDP). The primary balance was recorded at Rs257 billion or 0.6pc of GDP. The government has met budget deficit financing through Rs161 billion external and Rs322 billion domestic resources, including Rs230 billion bank borrowing and Rs92 billion non-bank borrowing. According to the Ministry of Finance, the country’s expenditure was recorded at Rs1.693 trillion (4.3pc of GDP). The government spent Rs742.1 billion on paying domestic and foreign debt servicing. The breakdown of interest payment shows that Rs685 billion was spent on domestic debt and Rs57.2 billion on foreign debt. The government had allocated Rs2.946 trillion for interest payment for the entire current fiscal year. Meanwhile, an amount of Rs224.5 billion was spent on defence. The government had allocated Rs1.289tr for the defence for the current fiscal year.

According to the statistics, the government spent only Rs70.7 billion on federal development projects in the first quarter. The provincial governments spent Rs89.8 billion on development projects. The documents show the government spent Rs86.7 billion on pension payments, Rs89 billion on running expenditure of the civil government, Rs2.85 billion on subsidies and Rs108.3 billion as grants during the first quarter.

Of the total revenues of Rs1.479 trillion, the government collected around Rs343.01 billion as non-tax revenues during the period. In non-tax revenues, the government collected Rs25.7 billion as mark-up on public sector entities, Rs1.5 billion as dividend, Rs105 billion as surplus profit of the State Bank of Pakistan, Rs8.152 billion as profit of the Pakistan Telecommunication Authority (PTA), Rs2.88 billion as defence, Rs2.96 billion as passport fee, Rs14.6 billion as royalties on gas and oil, Rs321 million as windfall levy against crude oil and Rs19.1 billion through other sources.

Tax collection has helped the government control the budget deficit. The Federal Board of Revenue (FBR) collected Rs1004 billion in the first quarter, exceeding the tax collection target by Rs40 billion. This is the first time the FBR has managed to cross the figure of Rs1 trillion in gross as well as net collection in the first quarter of a fiscal year. The gross revenue stood at Rs.1052 billion. The breakdown of tax collection of Rs1004 billion showed that the FBR had collected Rs363.6 billion as income tax while sales tax, federal excise duty and customs duty remained at Rs435.7 billion, Rs56 billion and Rs155.3b respectively.

The four provincial governments recorded budget surplus of Rs44.4 billion during the period as their expenditure remained at Rs614.5 billion as compared to the revenues of Rs658.9 billion. The government had budgeted provinces at a surplus of Rs242 billion during the current fiscal year. In the annual budget 2020-21, the government had set the fiscal deficit target at 7.1pc of GDP (Rs3437 billion) for the ongoing fiscal year. The Asian Development Bank (ADB) has projected Pakistan’s fiscal deficit to decline to an equivalent of 7.0pc of GDP in FY2021. Revenue is projected to increase, reflecting ambitious revenue-mobilization targets following initiatives to withdraw tax exemptions, rationalise tax concessions, and broaden the tax base. The forecast depends on COVID-19 risks subsiding and rapid economic recovery to pre-COVID norms.

Meanwhile, Pakistan’s exports grew for the second consecutive month in October to $2.066 billion, up 2.1pc from $2.024b in the corresponding period last year. According to the Ministry of Commerce, exports in the new fiscal year started on a positive note but witnessed a steep decline of 19pc in August before rebounding in September and October. Between July and October, exports fell by 0.1pc to $7.540b, from $7.547b over the corresponding months of last year. In FY20, exports fell by 6.83pc or $1.57b to $21.4b, compared to $22.97b the previous year. Data shows visible improvements in export orders from international buyers, mainly in the textile and clothing sectors since May.

On the other hand, imports posted a negative growth of 10.3pc in October to $3.653b, as against $4.074b over the corresponding month of last year. The continuous decline in imports has provided some breathing space to the government in managing external accounts despite a downward trend in exports. However, imports are now expected to increase in the coming months following the abolishment of regulatory duty on imports of raw materials and semi-finished products. In FY20, the import bill witnessed a steep decline of $10.29b or 18.78pc to $44.509b, compared to $54.799b in the previous year.

The country’s trade deficit also shrank by 22.6pc in October, mainly due to a growth in export proceeds. In absolute terms, the trade gap narrowed to $1.587b, as compared to $2.05b over the corresponding month of last year. In the first four months, the trade deficit narrowed by 4.5pc to $7.424b, as against $7.776b over the last year. During FY20, it narrowed to $23.099b, from $31.820b.

In another significant development, the Pakistani rupee continued to gain value against the US dollar. According to the State Bank of Pakistan, the US dollar has dropped below Rs158.91. The rupee has gained Rs2.28 against the greenback in two weeks. Remittances continue to grow at over $2 billion a month since the beginning of FY21, while the country posted a quarterly current account surplus ($792 million) after more than five years (last time a surplus was recorded was in 3QFY15) against a deficit of $1.49 billion in the same period last year.

The fiscal indicators show the country is not out of a fiscal quagmire as its gross revenues are decreasing but expenditure is growing at a double-digit pace due to a 30pc increase in debt servicing. The government must focus on increasing its revenues and reducing its expenditure to put the country on a path to sustainable growth.