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Pakistan Economy: Higher Current Expenditures Outstretched Budget Deficit

• Budget Deficit for the quarter ended Jul-Sep 2018 (1QFY19) was reported at 1.4% of GDP, higher than expectations as the Govt revised its full year budget deficit target of 5.1%. Further, this is also higher than previous year’s fiscal deficit of 1.2% during the corresponding period.
• Total tax revenues for the outgoing quarter are up by only 7% YoY to Rs975bn. Restricted growth in tax revenues was likely due to caretaker setup during the period and expected slowdown in economy (GDP growth for FY19 estimated at 4.0%-4.5% compared to 5.8% during FY18). Also, lower sales tax on petroleum products kept overall  Sales Tax collection growth 6.7%.
• On revenues front, taxes on international trade (like custom duties) witnessed significant rise of 22% amid currency devaluation and increase in duties by Govt. on imports of luxury goods. Other than this, royalties on oil/gas were up 82% YoY to Rs24bn amidst their indexation to crude oil price which was up 50% YoY during 1QFY19.  
• Total Expenditure increased by 12% to Rs1,644bn despite decline in Development Expenditures by 43% to Rs109bn. This is because Current Expenditures were up by significant 19% to Rs1,479bn.
• Within Current Expenditures, Mark-up Payments (interest on debt) was up 14% to Rs507bn due to both hike in domestic interest rate by 275 basis points and currency devaluation of 15% during the quarter. Further, defense expenditures were up 21% YoY. Excluding both mark up payments and defense expenditures, current expenditures escalated by 23% YoY mainly due to 22% YoY jump in provincial expenditures.
• We believe, Govt. is unlikely to achieve its fiscal deficit target of 5.1%. Also, IMF has stated in its recent report (Middle East and Central Asia outlook) that Pakistan’s fiscal balance is likely to clock in at 6.9% during FY19.