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Budgetary outlay in Q1 of FY22

The information on fiscal operations during the first quarter of 2021-22 of the Federal and the provincial governments has recently been released by the Ministry of Finance.

Overall, the first quarter consolidated budget deficit is reported as 0.8 percent of the GDP. This appears to be in line with the targeted fiscal deficit for the year of 6.3 percent of the GDP. Also, there has been success in reducing the deficit in comparison to the magnitude of 1.1 percent of the GDP in the first quarter of 2020-21.

The primary reason for the containment of the deficit is the phenomenal growth of 38 percent in FBR revenues. Import-based taxes have risen very rapidly on the back of over 60 percent growth in the value of imports during the quarter. Sales tax revenues on imports have increased by 70 percent while the growth in customs duties is 43 percent. Income tax revenues have also performed relatively well with an increase of 32 percent.

The exceptional performance of FBR revenues has been partially neutralized by a drop in federal non-tax revenues of 28 percent. The primary reason is the drastic cut in the petroleum levy in the face of a rapidly increasing international oil prices. This revenue source could only yield Rs 13 billion during the quarter as compared to Rs 136 billion in the first quarter of 2020-21.

Total revenues, tax plus non-tax, of the federal government have shown a growth of 22 percent in the quarter. The targeted annual growth rate of total revenues in the Federal budget of 2021-22 is 26 percent. Therefore, there is the likelihood that if this difference persists then the year could end with a significant revenue shortfall, despite the rise in tax revenues.

Total expenditure of the federal government has shown growth of 14 percent in the first quarter. Current expenditure increase has been limited to below 9 percent, while development spending has gone up by over 23 percent. One of the key features of the Federal budget was its expansionary nature in the form of a big increase in PSDP expenditure on projects.

The limited growth in current expenditure of the Federal government is attributable to an unusual development in the form of a decline in the mark- up payments on public debt. These are shown as Rs 623 billion in the first quarter of 2021-22 as compared to Rs 742 billion in the first quarter of 2020-21, thereby showing a decline of over 16 percent. This is highly unlikely given the rising stock of debt and little change in interest rates.

The question is whether the government has skillfully managed to show a lower deficit by deferment of some payments. The expected growth in debt servicing is 11 percent in 2021-22. Therefore, there is the likelihood that the debt servicing has been understated by almost Rs 200 billion and the budget deficit in the first quarter of 2021-22 is closer to 1.2 percent of the GDP.

There is faster growth in defense expenditure during the quarter of 17 percent, as compared to the annual target of increase of only 4 percent. Similarly, grants have jumped up by 60 percent, significantly more than the budgeted rate of increase.

There has also been a very unusual strategy adopted to finance the deficit. Complete reliance has been placed on external borrowing and the stock of domestic debt has, in fact, been reduced somewhat. Given the need to avoid increase in external debt repayment obligations it is surprising that in just one quarter there has been resort to almost $3 billion of net external borrowing.

The budgetary outlook for the next nine months of 2021-22 will hinge crucially on the growth in FBR revenues and the policy adopted for generating Rs 610 billion that were originally anticipated in the federal budget from the petroleum levy.

FBR revenue growth will depend upon the growth in the rupee value of imports, which increased by over 60 percent in the first quarter. This growth will moderate due to a rising level of imports in the last three quarters of 2020-21. Also, efforts will be under way in coming weeks and months to restrict imports to keep the current account deficit at a manageable level in 2021-22.

The government is apparently contemplating withdrawing some exemptions and reduced rates on items in the sales tax and reforming the personal tax system by reducing the number of slabs and making it more progressive. Such commitments have been made as a part of the IMF Programme. It is not clear at this stage how much additional revenues will be generated from these reforms.

Turning to the fiscal position of the provincial governments, the good news is that the four governments combined have ended the quarter with a large cash surplus of Rs 277 billion, as compared to the surplus of only Rs 44 billion in the first quarter of 2020-21.

The federal transfers to the provincial governments have shown phenomenal growth of 60 percent due to the buoyancy in the divisible pool of taxes. This has enabled resort to fast growth in current expenditure and development expenditure of 15 percent and 71 percent respectively and the accumulation of a large cash surplus.

Among the four provincial governments almost two-thirds of the cash surplus is with the government of Punjab. At the other extreme, the provincial government of Khyber-Pakhtunkhwa has shown a very small surplus of only Rs 3 billion.

Achievement of the annual consolidated budget deficit of 6.3 percent of the GDP in 2021-22 will require not only continuing fast growth in revenues but the four provincial governments will have to generate a big cash surplus of Rs 570 billion.

The financial year has started well. The deficit in the first quarter has been restricted to 0.8 percent of the GDP and a primary surplus has been generated of 0.3 percent of the GDP. We hope that this performance will be sustained throughout 2021-22.

Dr Hafiz A Pasha, "Budgetary outlay in Q1 of FY22," Business recorder. 2021-11-26.
Keywords: Economics , Budget deficit , Federal government , Tax revenues , Federal budget , Annual target , Khyber Pakhtunkhwa , GDP , IMF , PSDP

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