The approach adopted for quantification of the deficit is the 'below the line' measurement in terms of aggregation of borrowings from all sources, both domestic and external. The other approach is 'above the line' and involves determination of the gap between total revenues and total expenditure. The result of adopting this approach will be revealed later in the data of Fiscal Operations in 2016-17 by the Ministry of Finance (MoF). However, following reconciliation, the two approaches should yield the same estimate of the fiscal deficit. This is facilitated by allowing for a 'statistical discrepancy'. However, with good financial management the discrepancy should be small.
The first source of borrowing to finance the fiscal deficit is the borrowing from the banking system, both SBP and the commercial banks. There has been a fundamental change in the level and type of bank borrowing in 2016-17. The overall magnitude is estimated at Rs 1046 billion, with Rs 888 billion from SBP and only Rs 158 billion from commercial banks. This is 33 percent above the level in 2015-16, while the borrowing from SBP is at a record level.
Following the end of the IMF program, Ministry of Finance has opted for large-scale borrowing directly from the SBP. The advantage of relying on this source is that the interest paid reverts back to the Government in the form of profits of SBP. Also, there is less 'crowding out' of the private sector from commercial banks' credit, which consequently has increased by 75 percent in 2016-17. However, the large borrowing from the SBP has downstream inflationary implications.
The next major source is external borrowing. Conversion into rupees yields an estimate of Rs 534 billion, which is substantially greater than the borrowing in 2015-16 by over 44 percent. This is a reflection of the pressure on the balance of payments and the resultant fall in foreign exchange reserves. Almost Rs 314 billion has been borrowed, largely from foreign commercial banks, in the fourth quarter of 2016-17.
The last source is non-bank borrowing. Initial estimates are that it stands at close to Rs 350 billion. Over 65 percent is the inflow into national savings schemes. The remaining 35 percent is the acquisition of Government PIBs and treasury bills by the non-banking sector. Quasi-fiscal operations have also been larger in 2016-17. Borrowing by public sector enterprises has been Rs 255 billion, representing a jump of 134 percent over the previous year's level. A large part of this debt is probably guaranteed by the Federal Government. As such, this component of borrowing should be included in a broader definition of the fiscal deficit. Why has the deficit jumped up so much in 2016-17? Part of the increase in relation to the budget estimates is the extraordinary shortfall in FBR revenues by over Rs 250 billion. Similarly, non-tax revenues are likely to be below the budget estimate by almost Rs 150 billion. This is primarily due to lower receipts from the Coalition Support Fund. In addition, dividend income from PSEs has been somewhat lower. Further, the provincial governments have failed to make any contribution to reducing the overall fiscal deficit in 2016-17.
What are the prospects for 2017-18? The shortfall in FBR revenues in 2016-17 means that attainment of the target of Rs 4014 billion in 2017-18 will require a high growth rate of over 18 percent. This is unlikely, given that the nominal GDP growth rate is projected at about 11 percent. A shortfall of over Rs 200 billion in FBR revenues may also be witnessed in 2017-18. The MoF has continued to budget for an inflow of Rs 142 billion from the CSF in 2017-18. Given the recent pronouncements from Washington, the likelihood of such an inflow is very low. This will imply lower non-tax revenues than budgeted.
Further, the ongoing financial year is the election year. Both the federal and provincial governments are likely to engage in large populist spending. The PSDP allocations will, therefore, be close to or even exceed the budget estimates, unlike the large cutbacks in previous years. Consequently, the Provincial Governments may generate hardly any cash surpluses, as compared to the target of Rs 347 billion in 2017-18. In fact, the four Provinces combined have actually been in deficit to the tune of Rs 190 billion in 2016-17, probably because of a delay in transfers from the federal government.
All this means that the consolidated deficit may exceed the budget estimate for 2017-18 of Rs 1480 billion by as much as Rs 700 billion. This will imply a deficit of Rs 2180 billion, equivalent to almost 6.2 percent of the projected GDP. The bottom line is that the country is back to the era of large fiscal deficits of 6 percent or more of the GDP. The stabilization in public finances achieved during the tenure of the IMF programme has clearly been of a transient nature. Such expansionary fiscal policies will continue to put pressure on the current account deficit in the balance of payments and on inflation in the country.
(The writer is Professor Emeritus and former Federal Minister)
Copyright Business Recorder, 2017