KARACHI: The State Bank of Pakistan (SBP) on Saturday identified major risk to fiscal deficit target of 4.9 percent in the current fiscal year is from the revenue side as Federal Board of Revenue (FBR) unlikely to achieve Rs2810 billion target for 2014/2015.
In its monetary policy decision – in which the central bank kept the discount rate unchanged at 10 percent – highlighted the economic position of the country which is somewhat better than before but challenges, especially from the revenue collection, remain in near future.
“Major risk to the fiscal deficit target of 4.9 percent in FY15 is from the revenue side,” the SBP said. “In particular, the FBR revenue target of Rs2810 billions looks challenging given that no major tax reform has been introduced in the FY15 budget,” it added.
The SBP said that the revenue growth in the last fiscal year is mainly from the non-tax receipts. The central bank, however, said that the same may not be available in the current fiscal year.
“This underscores the need for reforms to broaden the tax base and improve the tax collection system,” it suggested. “Without enhancing tax revenues, it seems difficult to keep the fiscal deficit low while maintaining a minimum level of development spending,” it warned.
The SBP advised the government that continuation of prudent policies and reforms are needed to build-on positive developments and to achieve protracted stability. “Only comprehensive tax reforms can reduce the fiscal deficit and keep broad money (M2) expansion within safe limits on enduring basis,” the SBP said. “Similarly, energy sector reforms can not only provide critical impetus to economic growth but also help reduce import bill and thus ease pressure on the balance of payments position,” it added.
The central bank said that the target for last fiscal year had been missed despite a significant growth of 17.5 percent.
It further said that the government successfully brought down the fiscal deficit during in 2013/2014. The contraction in fiscal deficit primarily came on the back of: i) substantial increase in non-tax revenues; ii) reduction in energy sector subsidy and iii) decrease in development outlay of federal and provincial governments.
“Furthermore, efforts of fiscal consolidation were also reflected in a slower growth in total expenditures. The estimated fiscal deficit for FY14 has also been revised downwards to 5.8 percent of GDP from the budgeted 6.3 percent,” the SBP said in its monetary policy decision.
Highlighting the industrial sector performance till March 2014, which was declined marginally, the central bank said that volatility in exchange rate during FY14 affected the profitability of sectors more open to trade activities. On the other hand, energy sector gained on account of lower fuel costs payable in US dollars in the second half of FY14. “Moreover, increase in tax expenses also affected corporate profitability,” the SBP added.
According to Overseas Investors Chambers of Commerce (OICCI) bi-annual survey of March 2014, business confidence has gone down slightly due to rising cost of doing business, energy crises and deteriorating security environment. However, recent announcement of decline in corporate tax rate from 35 percent to 33 percent for large tax payers in the budget for FY15, may have slightly improved business sentiments.
Nevertheless, since most of the improvement in NFA and thereby lower pressure of government borrowings from SBP is due to non-recurring external inflows, sustainability of this trend could become challenging. For instance, despite lower net government borrowings of Rs196.9 billion from SBP during FY14 as compared to last year (Rs506.9 billion), the current year’s increase in SBP’s holding of MRTBs of Rs577.1 billion is higher than last year (Rs515.5 billion).
The difference between the two is mostly explained by an inflow of Rs157 billion in government deposits received as grant under PDF. Thus, rather than relying on transitory inflows, a meaningful increase in government resources such as tax revenues will be required to consistently contain and reduce the stock of government borrowings from SBP as stipulated in the SBP Act.
Another challenge in the monetary sector is less than desirable deposit mobilization by banks to meet the total credit demand of the economy. Thus, the growth in total private sector deposits was of 12.6 percent during FY14, could be due to (i) continued negative real return on deposits which may be encouraging households to save outside the formal economy (ii) government’s decision to allow access to FBR over information on depositor’s accounts with banks; (iii) tax on cash withdrawals; and (iv) lower government borrowings.
The SBP said that total revenues have been estimated to grow by 28.8 percent in FY14; the highest growth recorded in the last decade and higher than the budget estimates.
Reflecting the impact of increase in GST and removal of some tax exemptions and concessions, the tax revenues have been estimated to grow by 22.5 percent in FY14 against 7.1 percent increase in last year. Similarly, the FBR tax collection has been estimated to grow by 17.5 percent compared to a meager 2.9 percent growth witnessed last year. “Despite this relative improvement, the growth is below the 27.8 percent increase envisaged in budget estimates, resulting in breach of the target,” the SBP said.