Interest payments swallow 57% of tax revenues

Rupee depreciation, new debt lead to nearly 50% increase in interest payments

ISLAMABAD: The federal government's efforts to consolidate its budget have been overshadowed by a 46% increase in interest payments that ate up Rs1.3 trillion or 57% of tax revenues in first half of the current fiscal year, showed the Ministry of Finance's latest data.

From July through December of fiscal year 2019-20, the overall budget deficit contracted both in absolute terms and in relation to the size of national economy, primarily due to savings of Rs323 billion by provinces and hefty profit of Rs426.5 billion by the central bank.

The overall budget deficit - gap between total expenditures and revenues - stood at Rs994.7 billion or 2.3% of gross domestic product (GDP) in first half of the current fiscal year, according to the federal fiscal operations summary that the Ministry of Finance released on Friday.

The deficit was over Rs1 trillion or 2.7% of GDP in the same period of previous fiscal year.

Punjab Revenue Authority tax collection increases 23% in H1FY20

However, after making interest payments on loans and meeting defence-related obligations, the net federal revenues for the July-December period of 2019-20 were negative Rs167 billion. The government spent Rs1.3 trillion on interest payments and Rs529.5 billion on defence, taking total spending to Rs1.81 trillion.

Interest payments were significantly higher while defence spending was in line with the budgetary allocation.

Cumulative spending of Rs1.81 trillion on debt servicing and defence needs was equal to 86.5% of the total taxes collected by the Federal Board of Revenue (FBR) in the first half. The FBR got Rs2.1 trillion in taxes in the July-December period.

From July through December, the federal government spent Rs1.281 trillion on debt servicing, which was higher by Rs404 billion or 46% over the same period of previous year.

Domestic debt servicing stood at Rs1.1 trillion, up by Rs368 billion or 49% whereas foreign debt servicing ate up Rs160.5 billion, an increase of Rs36 billion or 29%.

Almost 50% increase in interest payments in just six months was because of devaluation of the rupee against the US dollar, high interest rates and the new debt acquired to finance the budget deficit and build cash buffers.

Net federal receipts are calculated after excluding the share of four provinces from the gross federal receipts. Gross federal receipts stood at Rs2.96 trillion, which increased by 40% over the same period of previous year due to an exceptional profit shown by the State Bank of Pakistan (SBP) and high taxes on petroleum products.

The share of provinces in federal collection increased by Rs126 billion or 10.5% to Rs1.643 trillion. The four provinces get 57.5% of the federal taxes as their share under the National Finance Commission (NFC) Award.

However, out of this sum, the four federating units saved Rs323.6 billion to help the federal government keep its overall budget deficit within the agreed ceiling.

Centre transfers Rs1.5tr to provinces under NFC

The increasing cost of interest payments has overshadowed the government's efforts to enhance both tax and non-tax revenues. There was double-digit growth in both tax and non-tax revenues, which was undermined by the double-digit growth in expenditures because of higher interest payments.

Tax revenues showed an 18.8% increase in the first half and stood at Rs2.25 trillion, up by Rs356 billion. Other taxes grew by 58% to Rs157.4 billion because of increase in petroleum levy rates. The petroleum levy collection stood at Rs138 billion, up by 70%.

Non-tax revenue collection increased to Rs718.8 billion, showing a 222% growth in the first half. This was because of central bank's profit of Rs426.5 billion in the first half against earnings of Rs63 billion in the same period of last year.

However, the IMF has placed a quarterly ceiling on the central bank's profit aimed at ensuring that the government does not completely rely on one-off revenues.

For the IMF programme, the SBP profit will be considered as only Rs341 billion in the first half and the IMF will not recognise Rs85 billion, as it is clearly stated in the programme document.

Total federal expenditures stood at Rs2.93 trillion, which were higher by Rs737 billion or 33.6% over the same period of last fiscal year. There was an increase of 35% in current expenditures in the first half, which stood at Rs2.63 trillion, according to the finance ministry.

Development spending, in the first half, increased by 51% to Rs276 billion.

The federal budget deficit in the first half was Rs1.3 trillion, which was equal to 3% of GDP. In order to finance the federal deficit, the government took net Rs513.5 billion in new foreign loans, which were higher by Rs295 billion or 135% during the July-December period, according to the finance ministry.

Published in The Express Tribune, February 15^th, 2020.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.