July 19, 2021 (MLN): The fiscal deficit stood at 1.1 percent of GDP in Q3FY21 against 1.7 percent in the corresponding period last year. This improvement was helped by a sharp 24.6 percent increase in FBR taxes which outpaced a nominal 0.3 percent growth in expenditures witnessed in this quarter.
According to the recent third quarterly report 2021 released by the State bank of Pakistan (SBP), the broad-based increase in FBR taxes during Q3 was the result of continued expansion in economic activity, FBR’s efforts to improve tax administration, the impact of price increase in some categories, as well as a low base from last year associated with the onset of the covid pandemic.
The fiscal deficit for July-Mar FY21 declined to 3.5 percent of GDP compared to 4.1 percent in the same period last year on the back of the government’s prudent policy stance by strengthening tax administration efforts and economizing non-priority current spending.
The report underlined that the primary balance (the difference between revenues and non-interest expenditures) recorded Rs 452 billion surpluses during Jul-Mar FY21 amounting to 0.9 percent of GDP, which not only exceeded the annual target of -0.5 percent but was also the highest in the comparable period since FY04. This shows that overall revenues were sufficient to absorb non-interest expenditures, and also partly covered debt servicing payments.
Aside from the improvements in fiscal and primary balances, the revenue balance, which reflects the difference between total revenue and current expenditures, remained at a similar level during July-Mar FY21 as compared to the corresponding period last year, which indicates continued strain on fiscal space for undertaking development expenditures.
The total revenues went up by 6.5 percent during July-Mar FY21, compared to a 35.1 percent increase in the same period last year. This growth is entirely explained by an 11.9 percent increase in tax revenues, while non-tax revenues showed a 7.3 percent decline in this period.
The improvement in economic activities, higher imports, FBR tax administrative efforts, a low base from last year, and inflationary impact in some categories led to a decent 10.9 percent increase in tax receipts during Jul-Mar FY21, compared to a 13.1 percent increase in the same period last year. Importantly, this increase was witnessed despite higher payment of tax refunds and the absence of any major increase in tax rates during this period.
The quarterly analysis shows that FBR taxes posted a significant YoY growth of 26.4 percent in Q3-FY21 compared to 6.5 percent last year. This rise reflects the impact of the low base of last year, amid Covid-led lockdowns in the month of March 2020. Specifically, the FBR tax collection posted a 5.1 percent YoY increase during July-Feb FY21. However, the 41.9 percent YoY surge seen in March FY21, pushed the overall growth to 10.9 percent for the overall Jul-Mar FY21.
The annual target for FBR tax collection was revised down to Rs 4.7 trillion from Rs4.9 trillion in March 2021, amid the third wave of Covid.8 The FBR taxes surpassed the revised target by around Rs 100 billion in July-Mar FY21.
However, the report highlighted that non-tax revenue declined in July-Mar FY21 compared to last year due to lower SBP and PTA profits. In fact, the contraction in these two heads alone led to Rs 231.2 billion reductions in total non-tax revenues in the period under review. However, this impact was partially offset by a Rs 170.9 billion increase in collections from Petroleum Development Levy (PDL) in July-Mar FY21.
On the expenditure front, during Jul-Mar FY21, federal expenditures grew by 4.9 percent, compared to a 21.0 percent increase in Jul-Mar FY20. A major contribution came primarily from growth in domestic markup payments and grants and subsidies which covered Covid related expenditures and social spending under the Ehsaas program. However, non-interest expenditures (including running of civil government, pension, defence, and federal development expenditures) declined by 0.4 percent as compared to a 15.8 percent increase in the same period last year. Specifically, the expenditures for the running of the civil government showed consistent YoY declines in the last two quarters, after witnessing an increase in Q1FY21.
Within current spending, a major increase was observed in markup payments, which grew by 11.9 percent during July-Mar FY21 as compared to 28.8 percent in the same period last year. This deceleration mainly came from a decline in foreign markup payments during the period.
The federal government development expenditures saw a 17.7 percent contraction during July-Mar FY21 as compared to a 9.3 percent increase seen in the same period last year. In fact, after witnessing an increase during Q1-FY21, the development expenditure edged down in the past two quarters, it added.
As per the Public Financial Management (PFM) guidelines of 2019, a strategy for fund allocation was introduced in order to streamline disbursements under PSDP spending. Accordingly, about 80 percent of the budgeted PSDP target ought to be spent up to March of every year. However, only 54.3 percent of the budgeted PSDP has been spent up to March 2021. This sluggishness is partly attributable to the government's efforts to contain fiscal deficit. This can also be seen from the reduction in FY21 budgetary allocation of federal PSDP to Rs 650 billion, from Rs 700 billion a year earlier, SBP said.
With the addition of Rs 1.6 trillion during July-Mar FY21, Pakistan's public debt reached Rs 38.0 trillion at the end-March 2021. The growth in the accumulation of debt slowed down to 4.4 percent during July-Mar FY21, compared to 7.6 percent in the same period last year. This slowdown is attributed to (i) reduction in fiscal deficit, which was partially contributed by the debt relief under DSSI; and (ii) higher revaluation gains on existing debt stock due to the appreciation of PKR.
While government external debt (including debt from IMF) posted a Rs 0.7 trillion decline in PKR terms in this period, the entire increase in public debt during Jul-Mar FY21 emanated from domestic debt, which increased by Rs 2.3 trillion during the period under review. This increase came from both a slight increase in the deficit financing requirements from domestic sources as well as the increase in government deposits during July-Mar FY21.
Quarterly analysis of public debt composition shows that the rise in public debt was almost equally distributed across the three quarters. While the external debt (in Rupee terms) recorded a YoY decline during Q3-FY21, domestic debt witnessed a sharp Rs 1.2 trillion expansion in Q3-FY21. This was led by an increase in the deficit financing requirements from domestic sources and an increase in government deposits with the banking system.
The report revealed that government domestic debt increased by Rs 2.3 trillion during Jul-Mar FY21, reaching Rs 25.6 trillion on end-March 2021. On a cumulative basis, during July-Mar FY21, almost 80 percent of the increment in domestic debt was sourced through long-term instruments.
Going by the report, Pakistan's public external debt reached US$ 81.6 billion by end-March 2021, with a 4.6 percent increase over its end-June 2020 position. Improvement in the current account balance amid strong remittances and debt relief provided under the DSSI kept the external financing needs relatively lower in FY21. Revaluation losses of almost US$1.1 billion due to depreciation of US dollar against other international currencies inflated the external debt in dollar terms. One-half of the revaluation losses were due to the appreciation of Special Drawing Rights (SDR) against the US dollar. Excluding the revaluation impact, the increase in external debt would have been much lower.
To note, the World Bank and the IMF urged G20 countries to establish the Debt Service Suspension Initiative (DSSI) in April 2020 with the objective of helping developing countries to manage the adverse impact of the Covid pandemic. In all, 73 countries are eligible for a temporary suspension of debt-service payments owed to their official bilateral creditors. Pakistan was also eligible for a deferment of both interest and principal repayments on bilateral official debt on repayments falling due between May 2020 and December 2020. In absolute terms, the DSSI has provided temporary relief of around US$ 3.7 billion to Pakistan, of which one-third of the relief is sourced from China.
Quarterly breakup shows that the stock of public external debt declined by US$ 0.8 billion during Q3-FY21 after recording an increase during the first two quarters. The stock of both long-term and short-term loans declined during the quarter mainly due to repayments to multilateral donors. This decline neutralized the impact of the increase emanating from inflows received against NPCs and foreign investment in government securities during Q3-FY21.
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