Certain risks afflicting fiscal sustainability

ISLAMABAD: The government has submitted mid-year budget review for the current fiscal year for 2020-21 before the Parliament, conceding that there were certain risks to fiscal sustainability and the fiscal position would depend on domestic and international evolution of COVID-19 pandemic.

According to the report, tabled in the National Assembly, stated that the fiscal consolidation measures, taken by the government, had resulted in financial discipline, higher revenues and controlled expenditures.

The same strategy will be followed during the remaining period of the current financial year to achieve the fiscal sustainability. The continuity in fiscal consolidation, stable exchange rate, improved current account and better financial management, present a promising economic outlook. However, there are certain risks to fiscal sustainability. “Going forward, the fiscal position would depend on the domestic and international evolution of COVID-19 situation.”

On the other hand, faster than anticipated economic revival is likely to increase demand for inputs. The Finance Division has adopted the facilitative policy of release of funds to meet the expenditures, both re-current and development, in accordance with the government spending priorities, added the report. “Nevertheless, the half-year fiscal position indicates that it will remain on track to meet the annual fiscal targets,” hoped the report.

On the revenue side, the FBR tax collection grew by 5.6 per cent during the first half of the current financial year (CFY) on a year-on-year (YoY) basis, despite an upsurge of COVID-19. Non-tax revenue remained at par with the previous year collection during the same period in spite of reduction in SBP profits and non-realisation of fees from cellular licence renewals, according to the report. The current expenditure was controlled through austerity measures and strict financial discipline. However, COVID-related expenditures were made to provide relief and mitigate the impact of the pandemic. Nevertheless, the increase in the federal net revenue and containment of expenditure limited the federal deficit to 3.1pc of GDP. Similarly, the current account balance continued to improve, posting a surplus of US$1.1 billion (0.8% of the GDP) during the first half of the CFY.

The government borrowing operations remained quite successful and in line with the medium-term debt management strategy (MTDS FY20-23). Just as in the case of last year, domestic borrowing came entirely from the financial markets and no borrowing was made from the SBP. In fact, an amount of Rs285 billion was repaid to the SBP during the first half of the ongoing fiscal year, added the report. Furthermore, all borrowing needed to finance the fiscal deficit was made through longer-term debt, while short-term debt (T-bills) was reduced by around Rs579 billion during this period.

For the financial year 2020-21, the overall fiscal deficit was projected at 7.0% of GDP. The overall mid-year fiscal indicators showed encouraging results, as considerable growth in net revenue and effective expenditure control measures helped contain the overall fiscal deficit to 2.5% of GDP. Primary surplus at 0.7% of GDP had been achieved, claimed the report.

The major sources of non-tax revenue for the federal government during the period were surplus profit of the SBP and petroleum levy. The latter showed growth of 110.4%. The federal government has been able to achieve 54% of budgeted targets during the first half of current fiscal year despite the adverse impact of the COVID-19 pandemic on economic activity.

The federal government comprises 34 ministries, 42 divisions and more than 300 allied entities including attached departments, subordinate offices, autonomous bodies, public sector companies and boards. Currently, the federal government’s financial governance apparatus is being run through 71 principal accounting officers, who have comprehensive administrative and financial autonomy to run the business of the federation. The current expenditure of the federal ministries/divisions was well within the budgetary control after completion of the first half of the financial year.

Expenditure on running of civic government has been restricted to 40% of the allocation by restricting supplementary grants and implementing austerity measures. Additional funds have only been approved as a supplementary grant by the federal government for CFY which remained unutilised under the economic stimulus package, announced during the last financial year, to extend the relief measures intended to mitigate the negative impact of COVID-19 pandemic on the livelihoods and businesses in the country. All additional needs of the ministries/ divisions have been met through technical supplementary grants from within the allocated budget, with primary reliance on re-appropriation of funds.

The public debt servicing was recorded at Rs1,475 billion, out of which, domestic interest payments amounted to Rs1,357 billion and external interest payments amounted to Rs118 billion. The total interest payments were in line with the budgeted amount and accounted for 50% of the annual budgeted estimates of Rs2,946 billion. An amount of Rs232 billion had been utilised against the PSDP allocation of Rs650 billion up to Dec 2020. Pace of utilisation was further picking up.