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Morning Call about – Fiscal Deficit expected at 6.3% of GDP in FY13 – Arif Habib Limited

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by March 21, 2013 Brokerage

Karachi, March 21, 2013 (PPI-OT): Budget deficit expected 6.3% of GDP Likelihood seems bleak for the budget deficit to remain at 4.7% as targeted by the government in the budget FY13.

According to – Arif Habib Limited with the fiscal indicators turning not-so- positive as the fiscal year unfolds, actual deficit could easily be higher clocking in at 6.3% of the GDP, in Arif Habib Limited views, compared to Arif Habib Limited earlier expectations of 5.9%.

Fiscal Operations (PKR bn) 1QFY13A HFY13A YoY FY13B FY13E YoY
Total Revenue

692

1,462

29%

3,234

3,055

18%

Tax Revenue

451

1,013

12%

2,504

2,166

5%

Non Tax Revenue

241

449

95%

730

889

73%

Total Expenditure

976

2,086

25%

2,960

4,520

15%

Budget Deficit (excl P.S)

(284)

(625)

17%

(1,185)

(1,466)

8%

External Financing*

(2)

(1)

10%

135

61

-53%

Domestic Financing

285

626

26%

971

1,423

15%

Budget Deficit as % GDP

1.2%

2.6%

4.7%

6.3%

-0.4%

Source: Ministry of Finance, Arif Habib Research

*Net of Repayments

YoY YoY Fiscal Operations (PKR bn) 1QFY13A HFY13A FY13E FY13B

Revenue remains contentious

Despite tax reforms promised in the last few budgets, the government could not fully implement them and, so far the tax revenue stands at a PKR 1,013bn in 1HFY13, up 11.9% YoY. The Federal Board of Revenue (FBR) had presented two tax amnesty schemes: a) bringing tax evaders into the tax net b) legalizing the smuggled vehicles at nominal rates, the latter has been implemented through an SRO, while tax amnesty bill could not be presented in the outgoing National Assembly, thus, fading away hopes for higher collections this year. The FBR is chasing the revised target of PKR 2,190bn. Arif Habib Limited estimation for the tax revenue works out to be even lower at PKR 2,166bn, a marginal 5% growth YoY (excluding 3G auction, Etisalat flows and tax amnesty estimates). This should take the overall revenue to PKR 3,055bn in FY13E; marking a 19% YoY rise.

Spending side; current expenditure on the rise

On the spending side, gov’t budget outlays have already been superseded when it comes to current expenditure – subsidies in particular. Total expenditure is expected to outgrow the government’s target of PKR 2,960bn in FY13. Arif Habib Limited estimates it to swell up to PKR 4,520bn by end FY13, a 15% YoY increase from last year’s PKR 3,936bn. The power subsidy alone has been exhausted and Arif Habib Limited expects it to easily cross the PKR 500bn mark once again. On the developmental side, Arif Habib Limited does see a higher spending with PSDP released-amount reaching PKR 185bn in 8MFY13(P). Bearing in mind that elections are around the corner, government spending is expected to go even higher.

Financing the deficit…

So far, IMF repayments and huge gov’t borrowings have been the highlights of the FY13 keeping the external financing balance in negative and domestic financing bloating, respectively. However, by the end of FY13, Arif Habib Limited sees the external and domestic financing reaching PKR 61bn (net of repayments) and PKR 1,423bn, respectively. This financing is exclusive of any further IMF loan as Arif Habib Limited doesn’t see any loan agreement happening with IMF any sooner amid the political transition. Thus, with a bloated fiscal deficit over 6% Arif Habib Limited expects continued pressure carrying over to the new political setup and the primary task to be handled to make a first step towards improving the root-cause of the overall economic issues.

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