In first year, govt sees record high fiscal deficit – Newspaper

ISLAMABAD: The first year of the Pakistani government Tehreek-i-Insaf (PTI) concluded with a record fiscal deficit of 8.9 percent, perhaps the highest in the country's history, as revenues plummeted while expenditures they remained at the same level as in the previous year, when expressed as a percentage of GDP. In absolute terms, however, expenses broke previous records, while revenues stagnated.

As a result, the fiscal deficit, which is the difference between federal government revenues and expenditures, reached a record 8.9 percent of GDP. At the end of June 2019, the government had announced that it intended to keep the deficit at 7.1pc of GDP, while its goal at the beginning of the year was set at 4.9pc. Since the country's GDP is Rs38.6 billion at current market prices, each percentage point increase in deficit numbers denotes a significant slip.

Read: Government projects fiscal deficit of 6.5-7pc for 2018-19

Details of the fiscal operations published by the Ministry of Finance on Tuesday place the country's annual fiscal deficit at Rs3,445tr or 8.9pc of GDP, the highest since 1979-80 according to the latest economic surveys in Pakistan. The deficit stood at Rs2.26tr or 6.6pc of GDP in the previous year.

Strong increase to 8.9pc despite the large drop in development spending

All the main fiscal indicators, both on the expense and revenue side, showed a deterioration during the outgoing fiscal year that ended on June 30, 2019. The numbers show that any effort made to control a dismantling of expenses ended in pain, although acute The income deficit had begun to emerge much earlier in the first three quarters of the year.

It seems that much of the deficit increase occurred in the last quarter. The deficit stood at 5pc of GDP at March 31 of this year, but jumped to a staggering 80pc (or Rs1,523tr) in the last quarter of the fiscal year from March to June.

"I have never seen such a high fiscal deficit in my career," said Dr. Ashfaque Hassan Khan, former economic advisor and now dean of the business school of the National University of Science and Technology (Nust), adding that the ministry Finance never focused on spending control while revenue was headed for historical deficits.

He maintains that the increase in the discount rate under the IMF program contributed around Rs1,110 billion to interest payments, including Rs1,020bn in domestic debt and around Rs90bn in external debt, claiming what they said were " general rules "followed by economists when drawing these calculations. Second, he attributed the devaluation of the exchange rate to the problem, claiming that "it also added around Rs3.2 billion to the public debt." When interest payments increase, so do current expenses and total expenses. ”

The deficit increased despite a strong development expense of 45{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} lower during fiscal year 2018-19 compared to the previous year. This was evident from the fact that the total spending of PSDP during 2018-19 was reduced to Rs1,008 billion compared to Rs1,456bn in 2017-18.

Surcharge payments during the year were recorded at Rs2.1 billion or 5.4 percent of GDP, the highest since 2001, compared to 4.4 percent of the latter. Interest rates skyrocketed during the year as the policy rate rose from 7.5 percent at the beginning of the mandate of the PTI governments in August to 13.25 percent and the value of the rupee declined sharply against the dollar. Both developments contributed to higher surcharge costs.

Defense spending, although it increased in absolute terms, remained unchanged at 3{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of GDP compared to last year.

One of the most damning results of the last fiscal year was an unprecedented sharp decline in the relationship between taxes and GDP, perhaps justifying the need for massive tax measures worth Rs1,550tr during the current year.

Data from the Ministry of Finance said that the overall ratio of taxes to GDP flattened to 12.7 percent in 2018-19 compared to 15.2 percent in the last year of the PML-N government in 2017-18. The year-round collections reached Rs4.9tr compared to Rs5.23tr a year earlier. This was also a rare phenomenon in which total revenues fell 6.3 percent in absolute terms. This meant that the government's fiscal machinery showed a negative performance both in absolute terms and as a percentage of GDP.

Tax revenues remained unchanged and showed no improvement in absolute terms, but fell to 11.6{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of GDP in 2018-19 compared to 13{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} in 2017-18. Federal and provincial taxes remained unchanged in absolute terms.

But that was not all. Non-tax revenues last year amounted to Rs427bn, almost 44pc less than Rs760bn in 2017-18. As such, non-tax revenues amounted to only 1.1pc of GDP, exactly half of the 2.2pc of GDP in 2017-18. The relationship between non-tax revenues and GDP was the lowest since 2001-02.

On the other hand, total spending amounted to 21.6 percent of GDP in 2018-19, slightly lower than 21.8 percent of GDP in 2017-18. In absolute numbers, current spending amounted to a gigantic Rs8.345 billion compared to Rs7.488tr the previous year.

Current spending, on the other hand, was reported at 18.4{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of GDP for the year ending June 30, 2019 compared to 17{7be40b84a6a43fc4fae13304fce9a2695859798abfc41afd127b9f8b21c5f9c5} of GDP in fiscal year 2018. In absolute numbers, current spending was recorded at Rs7 .104tr compared to Rs5.85tr from the previous year, an increase of 21.3pc.

Development spending and net loans amounted to 3.2pc of GDP, the lowest since 2008-09. A year earlier, development expenses and net loans had stood at 4.7 percent of GDP. The data showed about the expense of Rs1.219tr in this count last fiscal year, about 25pc lower than Rs1.62tr.

Published on Dawn, August 28, 2019