FeaturedNationalVOLUME 18 ISSUE # 50

Glimmers of hope?

The Finance Ministry has recently released a report detailing the consolidated federal and provincial fiscal activities for the first quarter (July-September) of the current year. This report paints a mixed picture, revealing some concerning trends and a few signs of potential improvement in Pakistan’s financial landscape.

The Finance Ministry has published a summary of the combined financial activities of the federal and provincial governments during the first quarter of the current year. This report indicates minimal, and in most cases, no improvement when compared to the same period in the previous year. According to the data released, the GDP for the period of July-September 2022 stood at 84,658 billion rupees. However, in the same period in 2023, it increased significantly to 105,817 billion rupees, marking a substantial rise of almost 25 percent. It’s important to note that this increase is in nominal terms and doesn’t account for inflation or the money in circulation. This raises concerns about the reliability of such a comparison, which is crucial for understanding any improvements or setbacks in key macroeconomic indicators at this stage.

Nevertheless, certain key indicators experienced changes during the first quarter of this year when compared to the corresponding period of the previous year as a percentage of GDP. Mark-up payments increased to 1.3 percent of GDP, up from 1.1 percent of GDP. Non-tax revenue rose to 0.4 percent of GDP, compared to 0.3 percent, reflecting a heavier reliance on the petroleum levy budgeted for the current year. This levy is, in essence, an indirect tax but is categorized under non-tax revenue due to the provisions of the National Finance Commission (NFC) award, despite the Auditor General’s recommendation that it be classified as an indirect tax, specifically a sales tax.

The budget deficit improved from negative 1 percent of GDP in the first quarter of the previous year to negative 0.9 percent in the corresponding period this year. This decline is attributed to a rise in total revenue, which reached 2.5 percent of GDP in the first quarter of 2023, compared to 2.4 percent in the same period of the previous year. Additionally, defence spending decreased to 0.3 percent in 2023, down from 0.4 percent the previous year. The primary balance was 0.2 percent in 2022 but increased to 0.4 percent in the first quarter of the current year.

Some indicators remained unchanged. Current expenditure remained at 3 percent of GDP, even though it has increased significantly in total terms. Tax revenue remained the same in the first quarters of 2022 and 2023 at 2.1 percent of GDP. Development expenditure and net lending remained constant at 0.3 percent. This expenditure plays a vital role in the country’s growth, particularly since government borrowing has been crowding out private sector borrowing, resulting in a decline in output.

One aspect that demands explanation is the substantial increase in the statistical discrepancy between the first quarters of 2022 and 2023, soaring from 78,203 million rupees to 193,563 million rupees, a rise of 147.5 percent. It’s worth noting that the former finance minister, Ishaq Dar, had a propensity for relying on statistical discrepancies, which are defined as untraceable expenses. These discrepancies reached 320 billion rupees in July-December 2022, and they were acknowledged by the Ministry of Finance.

In the current year, there is also a significant expected increase in the statistical discrepancy, reflecting Dar’s background in accounting. For provincial governments, the statistical discrepancy for July-September 2022 was negative 33,609 million rupees, but in the corresponding period this year, it rose to 120,032 million rupees.

The report also highlights concerning overspending by the Punjab and Khyber Pakhtunkhwa (KPK) governments. The former exceeded its budgeted spending by over Rs 28 billion. However, thanks to surpluses generated by the Sindh and Balochistan governments, the federal government managed to achieve a primary surplus of Rs 417 billion, not only meeting but exceeding the IMF’s conditions. The caretaker government may be contemplating unconventional policies within their expanded terms of reference but has yet to implement them. Up to this point, the policies of the past continue to be evident in the summary of consolidated federal and provincial fiscal operations for the first quarter of the current year. This includes increased borrowing and reduced development expenditure, creating fiscal space to fund current expenses.

There is still a heavy reliance on crackdowns in various markets, such as foreign currency and staple food items, as well as on combating electricity theft. However, without accompanying appropriate macroeconomic policies, the long-term effectiveness of these measures may be limited and may erode over time.

Overall, the government has shown its determination to reduce subsidies and significantly cut development expenditure on provincial public sector projects. With a substantial 362 percent increase in the collection of petroleum levy, it has been able to achieve improved performance. However, vigilance will be required to prevent the past trend of first-quarter surpluses turning into second-quarter deficits.

As we scrutinize Pakistan’s fiscal performance in the first quarter of the year, it becomes evident that challenges persist, from overspending by certain provincial governments to the anticipated rise in statistical discrepancies. While there are encouraging signs such as a primary surplus and increased revenue collection from petroleum levy, it is essential for the government to remain vigilant and implement effective macroeconomic policies. The transition from first-quarter surpluses to second-quarter deficits must be averted. These early fiscal indicators underscore the need for a comprehensive and sustainable financial strategy to steer Pakistan toward economic stability and growth.