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Fiscal policy development

Economists mention in the different economic reviews that sustainable public finances are significant to attain fiscal discipline in any economy. Further, it supports fiscal policy to sustain macroeconomic stability and decline vulnerabilities. However, it is also equally significant to deal on both revenue and expenditure side. Economists also mentioned that in previous years, Pakistan’s fiscal sustainability faced many issues from all directions counting tax evasion, untargeted subsidies, resource depletion through PSEs, high and persistent fiscal deficit combined with low tax to GDP ratio and narrow tax base. These Issues coupled with delays in the implementation of key structural reforms for revenue mobilisation created an irregular and low fiscal capability.

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The State Bank of Pakistan (SBP) revealed in a statement that a sharp rebound in tax collection assisted in containing fiscal deficit in the first quarter of FY2018. The fiscal deficit was registered at 1.2 percent of GDP in Q1-FY2018, lower than 1.4 percent in FY2017. The primary balance, which excludes interest payments, enhanced from a deficit of 0.1 percent in Q1-FY17 to a marginal surplus in Q1-FY2018. The revenue balance, the gap between total revenue and current expenditure, also shrank to 0.6 percent of the GDP in Q1-FY18 from 0.7 percent realized in Q1-FY2017. The improvement in primary balance shows government’s capacity to control its debt, while lower revenue balance indentifies the government’s ability to finance its operational expenses.

The officials of SBP also mentioned that the latter also reflects that growth in revenue collection outpaced the growth in current expenditures. The revenue collection increased by 18.9 percent during Q1-FY2018, against a fall of 8.0 percent previous year. This recovery in revenue collection was spearheaded by 22.0 percent rise in FBR tax collection. The growth in FBR tax collection in Q1-FY18 was not only the highest during the last five years, but was also broad-based.

 

Both the direct and indirect tax collection registered over 20 percent increase. This rebound in tax collection allowed FBR to double the amount of refunds to Rs 51.4 billion during Q1-FY18, compared to only Rs 25.9 billion in the same period of previous year. Though growth in expenditure was slower than that of revenue collection, it was considerably higher than that of last year. Not surprisingly, current expenditures increased much sharply on account of higher spending on defence, sustaining public order and safety, interest payments, environment protection, etc. The experience of previous election years explains that current expenditures typically jump in the election year. The development expenditure, on the other hand, gains some momentum in pre and post election years.

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This year, however, development expenditure is predicted to increase more from FY2017, given the budgetary target set for FY2018. The Q1-FY2018 statistics show trends in development expenditure strengthened further, rising by 15.6 percent on top of 12.4 percent growth recorded in the corresponding period of FY2017. It is also mentioned in a statement for financing of the fiscal deficit, the government of Pakistan relied heavily on bank borrowing, which financed about 93 percent of the fiscal deficit in Q1-FY2018.

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There was also a stark contrast in bank borrowing that was evenly distributed between SBP and scheduled banks in Q1-FY2018. The scenario was different last year when the government borrowed from SBP not only to finance the fiscal deficit, but also to retire its borrowing from the scheduled banks. The non-bank financing declined to Rs 24.5 billion in Q1-FY2018, while the same was Rs 69.3 billion in Q1-FY2017. Similarly, external finance was only Rs 7.9 billion, against Rs 68.8 billion in Q1-FY2017.
Accordingly, the debt accumulation in Q1-FY2017 was mostly because of a rise in domestic debt, while external debt also increased notwithstanding the decline in external finance. This rise in external debt was also because of appreciation of international currencies against US dollar.

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