FLASHNEWS:

JS Securities Limited – JS Research (08 May 2023)

Karachi, May 08, 2023 (PPI-OT): 9MFY23 Primary balance - 44% below IMF target

Pakistan's budget deficit contracted to 1.7% of GDP in 3QFY23 (from 1.8% in the 3QFY22). In absolute terms the deficit expanded 17% YoY for 3QFY23 - 20% YoY for 9MFY23 (3.7% of GDP - similar to last year). Deterioration was broadly contributed by 52% YoY higher mark-up expenses.

The primary balance however clocked in negative after first two quarters having reported a surplus. The 3Q primary balance at -0.5% of GDP took 9MFY23 balance down to +0.6%. As a result, the primary balance is now 44% below the target set by IMF vs a shortfall of just 4% in 1HFY23.

The primary balance readings for 9MFY23, along with dismal tax collection in April indicating possibility of further fiscal strain in 4QFY23 could carry repercussions for ongoing IMF talks for a successful conclusion of the Ninth Review and also reflect on any talks being held for FY24 Budget.

3Q primary deficit increases gap in IMF’s targets

Pakistan’s budget deficit contracted to 1.7% of GDP in 3QFY23. On an absolute basis however, fiscal deficit worsened as revenues and expenses, both reported similar pace of growth. Cumulatively for 9MFY23, fiscal deficit increased 20% YoY.

The 3Q primary balance however turned negative for the first time in FY23, clocking in at -0.5% of GDP, reducing 9MFY23 primary balance to 0.6% of GDP, compared to 1.1% of GDP reported in 1HFY23.

Primary balance performance, which was just 4% short of IMF’s performance criteria in 1HFY23, is now 44% below IMF’s performance target for 9MFY23. Against the target of Rs897bn, 9M primary balance was reported at Rs503bn.

Revenue collection at decent levels

During 3QFY23, tax collection growth clocked in at 16% YoY, while Non-tax revenues jumped by 23% YoY. The growth in Non-tax revenue for 3Q was led by Petroleum Levy collection (+3x YoY). To recall, compared to negligible PDL in 3QFY22, the incumbent government maintained PDL at Rs50/ltr (cap) on MS during 3QFY23, and increased by Rs20/ltr to Rs50/ltr (cap) in HSD. The total, however, comes at just 43% of annual target of Rs855bn, where assuming similar PDL in 4QFY23 is likely to still result in FY23E PDL collection shortfall of ~Rs290bn. Tax collection for 9M also increased by 16% and surpassed IMF’s 9MFY23 target by 6%.

Domestic mark up costs keep expenditures elevated

Total expenditures increased 17% YoY with higher costs witnessed across the board. A sizeable increase in debt servicing expenditure, broadly in domestic mark-up - owing to higher government borrowing and all-time high interest rates - took current expenditure up 18% YoY. During 3Q, debt servicing accounted for 54% of tax revenues this quarter, compared to 41% in 3QFY22.

Spending towards defence remained relatively flat, while subsidies costs increased 25% YoY. On the development expenditure front, Federal PSDP spending picked up in 3Q, marking a 7-quarter high. While Federal PSDP increased 43% YoY, total PSDP declined 9% YoY.

Risks emit from tax shortfall and higher spending, both

While government has started to enhance its efforts towards a contractionary fiscal policy, key risks to IMF’s FY23 primary surplus projection of 0.2% of GDP emit from popular measures citing election year. With sharp increase in debt servicing costs, the fiscal account has lesser room for slippages in other spending areas.

Moreover, a shortfall of Rs380bn in 10MFY23 tax collection from FBR targets have raised concerns, added by worsened budget deficit, amid ongoing IMF talks for the ninth review and approaching budget discussions for the year FY24. To recall, the recently increased Federal Excise Duty on cigarettes in the middle of the year to combat with tax collection shortfall, while many other options were under

consideration as well. These challenges are hence likely to lead to fiscal deficit for FY23 surpassing our initial estimates of 7.1% of GDP and Primary balance estimates of -2% of GDP.