January 6, 2021 (MLN): Pakistan’s fiscal indicators resumed their pre-Covid trajectory during Q1-FY21 compared to the previous quarter, however, the fiscal position was weaker compared to the same quarter of last year.
The improvement in fiscal accounts on a quarterly basis was driven by higher tax collections due to the resumption of economic activity, as a result, of which, the primary balance turned into a surplus again after recording a deficit in the preceding quarter, and the size of the overall fiscal deficit also shrank on a quarter-on-quarter basis.
Whereas, on yearly basis, the weak fiscal position was largely attributable to higher interest payments and provincial development spending, as well as a sharp decline in non-tax revenues. As a result, the stock of public debt ticked up further during the quarter; nonetheless, the pace of public debt accumulation was considerably contained compared to Q1-FY20, primarily due to the lower volume of incremental government deposits with the banking system.
In its first Quarterly report for the FY21, the State Bank of Pakistan (SBP) noticed that as a result of ease in lockdowns, fiscal indicators began to revert to their pre-Covid trends during 1QFY21 and the government partially regained the consolidation momentum of the first three-quarters of FY20 and recorded a healthy primary surplus compared to a deficit recorded in the preceding quarter.
Nonetheless, compared to the same period last year, the primary surplus recorded in Q1-FY21 was 9.9% lower due to a steep fall in non-tax revenues and a sharp rise in development spending of the provincial governments. Additional strain to fiscal accounts came from a 29.8% growth in interest expenses as bulky coupon payments for longer tenor instruments as well for 12-month instruments fell due. As a result, the overall fiscal deficit recorded almost 70% growth in 1QFY21 over last year.
To note, for FY21, the government has set the fiscal deficit target at 7% of GDP, lower than the actual deficit last year (8.1%). Whereas, for the primary deficit, the government has set a target of 0.5%of GDP compared to the actual deficit of 1.8% last year.
As per the report, when seen in the context of targets, the fiscal sector over-performed during Q1-FY21. Compared to the deficit targeted for the full year, the government recorded a primary surplus during the first quarter. This performance was attributed primarily to FBR tax collections (4.2% higher than the quarterly target), which partially offset the expected decline in non-tax revenues, which had risen exceptionally strongly last year due to one-off collections of the license fee by PTA as well as SBP profits.
On the expenditure side, the government was also able to curtail its non-interest spending such as pensions and defense, against the increases targeted for the full year under these heads.
During the period, the government made significant for locust control, hospital services, and disaster management. In addition, the government increased PSDP allocations for FY21 compared to actual spending in FY20, especially to expedite infrastructure projects including dams/hydel power, logistics, and development of underserved regions. To carve out fiscal space for these expenditures, the government cut allocations for untargeted subsidies on power and petroleum and exercised nominal freezing of salaries and pensions for the year.
In overall terms, though higher than the same period last year, the fiscal deficit recorded during Q1-FY21 was 15.2% of the deficit envisaged for the full year. During the past five years, the average contribution of the first quarter has remained around 18.3 percent of the full-year deficit. This performance, along with the debt management strategy the government rolled out last year, was instrumental in keeping debt accumulation at a manageable level, the report highlighted.
With regards to public debt, despite higher financing needs during Jul-Sep FY21, the rise in public debt was almost one-third of the increase recorded in the same period last year. This improvement primarily reflects the impact of lower deposit accumulation by the government (Rs 74.2 billion in 1QFY21 compared to Rs 1.8 trillion in 1QFY20).
Moreover, in addition to revaluation gains on the existing debt stock due to appreciation of the PKR against the US dollar, the Medium-term Debt Strategy (2020-23) of the government allowed provision for a revolving cash buffer in the wake of its commitment of zero fresh borrowings from SBP. The overall profile of public debt has also improved during Q1-FY21, as the maturity profile was lengthened, rollover risks were contained, and the share of concessional external funding increased.
SBP underscored that the government achieved this primarily via the introduction of long-term instruments with floating returns in the domestic debt market, which helped keep investments in long-term papers intact. Moreover, the appetite for foreign funding from commercial creditors remained subdued, as the surplus generated in the current account and servicing relief from G-20 countries under the DSSI helped alleviate pressure on external debt management. Nonetheless, the repricing risk of the public debt stayed at an elevated level, SBP added.
Aside from these improvements, the report noted that a high amount of uncertainty persists with respect to the Covid trajectory and possible policy adjustments that it might necessitate, Although the government has made significant provisioning against contingencies in the Budget, the trends in 1QFY21 call for tighter control on discretionary spending.
Specifically, mark-up payments are already weighing heavily on limited fiscal resources (73.4% of FBR taxes), and these could put further pressure on public financial management if debt accumulation is not sustainably contained.
As things stand, FBR’s tax base is concentrated heavily on indirect sources, within which import- and energy-related collections dominate, making the revenue stream excessively vulnerable to business-cycle and external shocks. Furthermore, quasi-fiscal pressures in the areas of energy (circular debt) and losses in other PSEs also warrant decisive policy actions, the repport said.
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