Fiscal discipline: Govt reins in spending by 10% in first quarter

Cuts came largely from the govt’s own running expenses, including defence.

ISLAMABAD: After taking flak for missing its deficit targets two years in a row, the government appears to have made a good start to the current fiscal year, spending Rs60 billion – or about 10.4% – less than it had allocated for the first quarter. The significant cuts to government spending include reductions in defence expenditures.

Against an allocation of Rs574 billion in spending, the government managed to restrict its expenses to Rs514 billion for the first quarter of the fiscal year ending June 30, 2011, according to an official at the finance ministry. In what appears to be a response to public calls for austerity, six out of every ten rupees in cuts came from the government’s own running expenses and included defence.

The budget deficit for the first quarter came in at Rs232 billion, or about 1.1% of the total size of the economy, and a little below the 1.2% of gross domestic product set as the upper limit target for the first quarter. The government’s overall target for fiscal year 2012 is Rs850 billion, or about 4% of GDP, and had been deemed “unrealistic” by independent economists.

In what is likely to be good news for the country’s international lenders, the single biggest item that was cut was subsidies, which saw a Rs16 billion – or about 8.1% – cut to Rs180 billion. Interest payments on the government’s debts also helped matters, shaving Rs9 billion off expenses. The reduced interest payments came from the sharp decline in rates on the Karachi bond market in anticipation of the eventual central bank interest rate cut in early October.

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Finance Minister Abdul Hafeez Shaikh seemed keen not to brag nor get complacent about what appears to be a significant achievement. “The country is continuing on the path of reforms and we ought to maintain this posture even in difficult times,” he said.

The government’s position was also helped by the tax collections, which exceeded their quarterly targets by Rs13 billion according to Federal Board of Revenue Chairman Salman Siddique. Non-tax revenues, however, were down by Rs35 billion, the bulk of which is due to the fact that the government did not raise petroleum prices in accordance with global price hikes, absorbing the shocks through a reduced petroleum tax.

Despite the positive numbers for the first quarter, the mood at the finance ministry is far from celebratory. One finance ministry official said that if the government failed to restructure state-owned companies, particularly in the power sector, the costs of the subsidies and bailouts would wipe out any gains made so far.

Another risk was global oil prices, which would dramatically change the economic picture for the worse, said the official.

Going forward, it may be difficult to sustain the current trend. The government had included in its revenue estimates $500 million in exchangeable bonds issued by the state-owned Oil and Gas Development Corporation, the largest company in Pakistan by market capitalisation. However, international bond markets have not been receptive to high-risk bonds from frontier markets such as Pakistan, particularly after the troubles in the Euro zone.

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One option currently being considered is issuing an Islamic bond (sukuk) instead. The Shariah-compliant capital markets have not yet been affected by the global debt crisis and the government appears to have found some interest during the finance minister’s visit to Washington in September.

Published in The Express Tribune, October 20^th, 2011.