Rising short-term fiscal deficit versus falling long-term trust deficit in the economy

Talk of the twin deficits i.e. Fiscal deficit and Current Account Deficit (CAD); while the latter has been on the recovery mode, the former seems to stay stubborn; wants some time and needs structural corrections before it eventually gets into a good mood.

Let’s accept the reality that the fiscal deficit is a long term affair (1HFY19 at 2.7% of GDP, FY19 expected over 6.5%), given the fact that the fiscal mess has not been created overnight; it’s always the result of raising rationally less (tax-deficit more for political reasons) and spending recklessly more (debt-driven more for non-productive reasons). This side of the deficit has also fallen prey to many shenanigans done in many political tenures, thereby showing half the picture of the deficit to produce as strong a position of performance of one’s own, as possible.

So, comparing the present scale of fiscal deficit in a relative context (% of GDP) may not be a true comparison, if some key adjustments are done to the govt’s balance sheet (this aspect merits a detailed piece later on).

Beside austerity and productive expending, the two simple but not easy-to-implement aspects for tax growth is: 1) consistently high economic growth (lower growth affects the tax growth), and 2) enhancing the number of tax payers through incentives, less documentation, easier process with less confrontation with collectors, or say more system-driven, as easy as one pays his/her utility bills.

On the external side, Pakistan’s Current Account Deficit (CAD) during Jul-Jan19 shrank by 17% YoY, or by US$1.7bn, to US$8.4bn (US$ 1.20bn), versus US$ 10.1bn SPLY (US$ 1.44bn per month). CAD in Jan-19 shrank by a massive US$735mn to US$809mn, or 52% MoM, versus CAD in Dec-18 that stood at US$1.54bn.

To give it a further context, CAD now stands at 4.9% of GDP for 7MFY19, versus 5.4% SPLY, down 50bps YoY. Country’s bond premiums have also came down significantly (Credit Default Swaps down by over 150bps) as the bonds rallied by over 100bps.

So, clearly, the external risks and vulnerabilities have subsided versus what the scale was 6 months back. Forex reserve though still at concerning levels, but the rate of decline has substantially gone down to about US$100mn now, versus over US$300-400mn earlier.

With the country gaining long-term commitment of over US$ 25bn in FDI, with first 6M of FDI crossing US$1.2bn (showing the trust deficit of investors is reducing fast), and the short-term crucial support through Cash/Trades, the positive outlook of Pakistan economy, as I shared at the end of the year 2018 terming 2019 the year of correction (1H) and recovery (2H), is solidifying.

Fiscal deficit is however a ‘beast’ to cage in.

By Khurram Schehzad

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