Fiscal management issues

The latest figures show impressive growth in tax revenue. According to FBR, federal tax revenues grew by 22 percent in the1QFY18. The LSM grew by 8.36 percent in 1QFY18, and full year GDP may surpass the target of 6 percent. Given the current tax base, the collection may grow in the coming days. Further, the tentative numbers of FBR for 5 months of the current fiscal year also show a continuation of the trend in the first quarter. A detailed analysis reveals that direct tax grew by 24 percent, signifying that businesses are making profits to pay more taxes. Sales tax growth is over 20 percent, which is due to a combination of higher domestic goods consumption and higher imports.

On the other hand, the provincial taxes are also growing rapidly, though on a smaller scale. The tax collection increased by 35 percent and within it, GST on services took the lead with 54 percent. However, the GST on services is a small fraction of GST on goods, leaving much room in services sales tax expansion. The highest growth is seen in custom duties which are up by 27 percent in 1QFY18 as imports growth seems to be the biggest contributor to increase in taxes. The petroleum levy is up by 24 percent due to higher consumption of transportation fuel. There is much more room for it to grow as oil prices are not high and Pakistan has kept consumer prices low. However, non-tax revenues are down by 10 percent. The silver lining is the recent passage of CSF reimbursement by US congress, which may result in some inflows in the remaining quarters of this fiscal year.

Along with the revenue, the total consolidated expenditure also increased by 13 percent, while the federal government spending increased by 15 percent. In term of current expenditure, a loose policy has been in evidence. Many unnecessary expenses have been incurred. Provinces were more profligate as their spending jumped by 26 percent versus 12 percent increase in federal counterpart. On the development side, the federal government has been on a spending spree as federal PSDP jumped by 57 percent, as compared to a decline of provincial PSDP by 7 percent. But the overall PSDP increased by 17 percent.

Provincial governments have put up a commendable performance. They recorded a budget surplus of Rs52 billion against a deficit of Rs163 billion in 4QFY17. Usually provinces do not spend much on development in the initial part of the year as in the corresponding period last year, provincial government showed a surplus of Rs80 billion. They can be expected to spend more as the year rolls on and there is more demand from the public for welfare projects. The consolidated budget balance stood at Rs441 billion or 1.2 percent of GDP versus Rs438 billion or 1.4 percent of GDP in the corresponding period last year.

The net financing has solely remained dependent on domestic banking sources (Rs408bn) which shows an increase of 36%. In case of foreign financing the gross amount stood at Rs150 billion. This is not a healthy trend as relying mainly on domestic banking sources can hamper private sector credit growth. With $2.5 billion raised from international bonds recently, the financing equation is likely change in the second quarter. From the current trend it can be concluded that for the remaining part of the year, tax revenue growth will continue at a satisfactory pace, and provinces will show budgeted surplus. But fiscal managers will have to be on their toes to achieve the desired targets.

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Mian Bilal