Revenue collection on target, but deficit still likely to widen

FBR meets six-month schedule, but lack of CSF and lower SBP income hurt revenue.

ISLAMABAD: The government is meeting its revenue collection targets but may still exceed its targeted budget deficit. While tax collection has so far met the government’s own schedule, the refusal by the United States government to release Coalition Support Funds may still cause the budget deficit to exceed even the revised target of 4.7% of the total size of the economy.

Confounding expectations, the government has so far met its revenue collection targets for the first half of the current fiscal year that ends on June 30, 2012, with the Federal Board of Revenue collecting Rs841 billion from July through December.

FBR Chairman Salman Siddique told The Express Tribune that the first half’s collection was 27.1% above last year’s collection of about Rs662 billion, during the same period. The government needs to beat last year’s collection figures by an average of 25.5% in order to meet this year’s target of Rs1,952 billion.

The numbers released by the FBR on Monday were only provisional, based on projections from the online cash reporting system. The complete reconciled report will be available a month later. Nonetheless, the FBR chairman was clearly pleased with his organisation’s efforts.

“Over 27% growth in direct taxes’ collection and an impressive 32% growth in sales tax led to the achievement of the first half target,” said Siddique proudly.

The next six months, however, may prove to be more challenging. The FBR still needs to collect Rs1,111 billion by June 30. Among the assumptions of that projected target was that the federal government would be allowed by the provincial government to collect sales taxes on services. Yet Sindh – which has one of the largest service sectors in the country – has thus far refused to grant the FBR that permission, collecting Rs12 billion on that account during the first six months of fiscal year 2012.

Yet what is most likely to throw the government’s budget deficit off – at least from the revenue side – will be the lack of funds flowing in from the United States. The government had estimated that it would receive Rs119 billion from the US Coalition Support Fund, but has so far not received any amount. Inflows from the CSF form about 19% of the government’s expected Rs658 billion in non-tax revenues during fiscal 2012.

As a result, the finance ministry is unlikely to hit its first half budget deficit target and has already revised the target for the full year upwards from 4% to 4.7% of gross domestic product, or about Rs990 billion.

The finance ministry is projecting a half-year deficit of 2.5% of GDP, or about Rs536 billion. During the first quarter of the year, the budget deficit was 1.2% of GDP, or about Rs257 billion.

Many experts do not believe the government will be able to achieve even its revised targets due to some assumptions that no longer hold true. For instance, the government had budgeted Rs200 billion in revenues as profits from the State Bank of Pakistan. Given the fact that the SBP’s discount rate has been cut from 14% to 12% during the course of the last six months, it is unlikely that the central bank will be able to earn as much as the government needs it to from its lending activities to commercial banks.

Even December’s results showed some signs of strain. The FBR collected Rs202 billion last month, about 3% short of the Rs208 billion target. The only reason it was able to meet the six-month target was because of better results in previous months.

Published in The Express Tribune, January 3^rd, 2012.