FPS: Fiscal deficit remains higher than the set threshold, jumps to 8.6% of GDP

February 8, 2021 (MLN): The government failed to reduce the federal fiscal deficit to 4% of the GDP during FY20, as prescribed in FRDL Act, 2005, which requires the federal government to take measures to reduce the fiscal deficit and maintain the total public debt within prudent limits.

In the Fiscal Policy Statement of 2020-21, which had been submitted before the Parliament in its recent session,  the Ministry of Finance stated that the Federal fiscal deficit excluding grants during FY20 stood at Rs 3.6 trillion or 8.6% of GDP, thus, remaining higher than the threshold set by the law.

The Finance Division, in the policy statement, explained that the government achieved visible improvement in the fiscal position of the federal government during the first three-quarters of the FY20, however, in the aftermath of the Covid-19 pandemic, the strong fiscal position of the federal government (pre-covid) was challenged by the outbreak of a pandemic. Pressures emerged simultaneously on both expenditure and revenue sides. Nevertheless, this departure on the fiscal side was temporary, and the earlier gains had created enough fiscal space to deal with pandemic shock and kept the full-year primary deficit lower than the last fiscal year. In addition to this, the government also took various measures including a grant of the economic stimulus package to mitigate the adverse impacts.

The policy statement admitted that the debt per capita is mounting and jumped to Rs 175,000 at the end of last fiscal year. The statement also revealed that the government failed to achieve its target of decline in public debt to GDP ratio to 84% as it grew to 87.2% of GDP in FY20 after the outbreak of the COVID-19 pandemic.

The total public debt as per the statement was Rs 36.399 trillion, recording an increase of Rs 3.691 billion during FY20. The government blamed previous regimes for the debt burden by highlighting that interest payments on debt obtained by the previous governments constituted a major share in total interest payments during FY20. Overall, the government paid Rs 2.6 trillion against interest payments. The government also used a portion of cash balances to finance the federal fiscal deficit, leading to a reduction in the total debt stock. It is also noted that the currency devaluation impact was much lower in FY20 as Pak- Rupee depreciated only by 3% against USD during the year.

Compared to the previous policy statement, the current statement contains very little information. Despite the fact that the FRDL Act of 2005 stipulates the government that the Fiscal Policy Statement shall contain the analysis to the fullest extent possible of all policy decisions made by the federal government and all other circumstances that may have a material effect on meeting the targets for economic indicators for that fiscal year, the most of the critical information regarding 2019-20 policy was missing in the statement.

On the expenditure side, the statement revealed that current expenditures of the government remained at a high level of 20.4% of GDP in the last fiscal year 2019-20. Compared to that, development spending was the lowest as it stood at 2.8% of GDP, of which federal development spending share was only 1.3% GDP.

Moreover, the total expenditure as a percent of GDP was at the highest level of 23.1% in 21 years, as per the statement.

On the revenue front, the total revenues increased to 15% of GDP. The tax revenues stood at 11.4% -slightly lower than the previous fiscal year. The non-tax revenues increased to 3.7% of GDP, the highest level in past six years.

With regards to FBR collections, the statement revealed that in FY20, the government had set the FBR’s revenue collection target at Rs 5.5 trillion, but the actual collection was less than Rs 4 trillion. According to the statement, the decline in the collection was due to the Covid-19 pandemic whose economic repercussions affected Pakistan’s economy.

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Posted on: 2021-02-08T16:06:00+05:00