market guru—–Pakistan’s budget deficit expands to 1% of GDP

JS Global Capital: Pakistan’s budget deficit expanded to one per cent of GDP in the first quarter of FY23 from 0.7 per cent of GDP during the same period of the last year.

Similarly, the primary surplus also recorded a contraction, reporting at 0.2 per cent of GDP against 0.3 per cent in the first quarter of FY22.

The surplus missed the performance criteria defined by the International Monetary Fund (IMF) in the latest staff report; wherein, the first quarter of FY23 end Pakistan’s ceiling for primary account was set at a surplus of Rs339 billion (0.4 per cent of GDP).

Having said that, relative worsened fiscal account was on account of slowdown in tax collection growth to 16 per cent YoY, primarily owing to almost flat sales tax and Customs duty collection.

The tax collection dropped 8 per cent from the previous quarter, while non-tax revenue collection improved sequentially.

It is fairly evident from the quarterly print that consolidation in the economic activities through contraction in the import bill and the absence of sales tax on the petroleum products are denting tax collection growth. Resultantly, there is a high likelihood that more fuel rate hikes on account of petroleum levy and resumption of the general sales tax (GST) will follow, as we move towards IMF’s 9th programme review scheduled this month.

To recall, the IMF has provided specific suggestions to reach out to contingencies at the earliest signs of fiscal programme underperformance, where any signs of slippages in the monthly data sets regarding revenue collection should be followed by an immediate increase in the GST on fuel (currently zero), further streamlining of the GST exemptions, including on the consumer items and other unwarranted exemptions such as those benefiting exporters, and, or, increasing the federal excise duty on Tier I and Tier II cigarettes.

A sizeable increase in debt servicing expenditure during the first quarter to Rs954 billion, up 53 per cent YoY, took current expenditure up 29 per cent YoY to Rs2.54 trillion.

More spending was also witnessed towards defence, pension and subsidies. In line with the expectations built post-floods situation, the Public Sector Development Programme (PSDP) spending remained lower than the last year over the government’s likely shift in spending priority in the tough macro environment.

While the government has started to enhance its efforts towards a contractionary fiscal policy, key risks to the IMF’s FY23 primary surplus projection of 0.2 per cent of GDP emit from earlier elections and spending on flood-impacted segments from the fiscal account.

News reports already suggest the IMF’s concerns over the recent Kissan package and subsidies announced to the export-oriented sectors, which cumulatively may add Rs2 trillion (3 per cent of GDP) expenses to the fiscal account of FY23.