Early gains: Government keeping it tight at the fiscal front

Cut in expenditure remains focused on reducing development spending.

ISLAMABAD:

The government seems to be building on early gains at the fiscal front, restricting the gap between national income and expenditure to Rs418 billion during the first four months of the fiscal year. However, the belt tightening remains focused on reducing development spending.

The consolidated budget deficit for the period of July-October of the current fiscal year remained at Rs418 billion or 1.6% of the Gross Domestic Product (GDP), which is well within the limit set by the International Monetary Fund (IMF). The IMF has asked Pakistan to implement steep cut on expenditures and restrict its budget deficit to Rs1.5 trillion or 5.8% of the GDP in the current fiscal year ending on June 30.

The total revenues stood at Rs1.02 trillion out of which the federal government transferred Rs410 billion to the four federating units on account of their share in federal taxes, according to officials. The net revenues were recorded at Rs610 billion, while the expenditures soared over Rs1.1 trillion, showing a gap of Rs490 billion or 1.9% of GDP.



However, out of their share of Rs410 billion, the provincial governments made Rs72 billion in savings, which helped bring the budget deficit down to Rs418 billion or 1.6% of the GDP.

The interest payments during first four months remained at Rs410 billion, which were about 38% of the total expenditures.

The disbursements of $322 million (Rs34 billion) by the US on account of Coalition Support Fund in the first week of October and massive reduction in development expenditures helped the government to keep the budget deficit within manageable limits.

The actual federal development spending in four months remained at Rs68 billion, which was just 6.1% of the total expenditures incurred in four months and only 12.6% of the annual Public Sector Development Programme of Rs540 billion. The low development spending will result in slow economic growth this year.

In order to keep the overall budget deficit at 5.8% of the GDP, the IMF has asked Pakistan to show restraint on development spending and to keep it at Rs410 billion, which is Rs130 billion less than parliament’s approved development budget.

The reduction in the development budget is equal to the anticipated shortfall in tax collection against the Rs2.475 trillion annual target. The IMF lowered its tax projection and included Rs2.345 trillion revenue collection in its fiscal framework.

Out of Rs1.02 trillion total revenues, the FBR’s tax collection was Rs620 billion, according to the ministry of finance. Contrary to this figure, the FBR has claimed that its collection was Rs637 billion. The Ministry of Finance takes the tax collection figure, which is reconciled by both the Accountant General of Pakistan Revenue and State Bank of Pakistan, which suggest that the FBR is overstating its collection.

While talking to The Express Tribune, FBR chairman Tariq Bajwa said that the Rs637 billion collection figure was correct. He said the FBR already explained its position to Finance Minister Ishaq Dar.

Bajwa said the difference was due to a lag in reporting time.

To bridge the gap between national income and expenditures, the entire financing of Rs 418 billion was arranged from the domestic market, as contrary to hopes the net external budget financing remained nil.

Domestic financing was arranged by printing notes by the SBP. In four months, the SBP borrowings stood at Rs597 billion as the government also returned some of the commercial banks, borrowings by printing more notes.

The budget support borrowing from the SBP has increased to an unprecedented level of Rs842 billion till November 22. The massive borrowing is expected to keep inflation in double digits, as its initial impact has started appearing. Economists say the full impact of printing notes usually appears after five to six months.

Published in The Express Tribune, December 8^th, 2013.

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