Fiscal operations under pressure

Budget deficit expands to 3.8% of GDP in four months
* Mixed results for fiscal operations from recent policy changes, says Treasury
* Revenue seen falling in terms of GDP

Amidst a challenging macroeconomic environment government expenditure growth has raced ahead of revenue growth and the government deficit for the first four months of this year topped 3.8 percent of GDP, the Ministry of Finance and Planning said last Friday (June 29).

The full year budget deficit target for 2012 is 6.2 percent of GDP and the Treasury said that it would stick to this target despite the aberrations the economy was facing.

"The fiscal performance has to be analyzed considering the impact of the measures introduced by the government in February 2012 to contain the trade deficit of the country, which was widened significantly in 2011. The measures included the pursuance of greater exchange rate flexibility, tightening of monetary policy through increases in Central Bank policy rates and the pursuance of strategies to moderate bank credit growth as well as adjustments in domestic petroleum, electricity and transport prices to reflect the developments in the international market. These measures, together with the depreciation of the rupee in line with the exchange rate flexibility during the first five months of the year, had a mixed impact on the government fiscal operations," the Treasury said.

Revenue reached 4.1 percent of GDP during the first four months of this year, down from 4.4 percent a year earlier while recurrent expenditure reached 5.9 percent of GDP, up from 5.6 percent a year ago and public investment reached 2 percent of GDP from 1.6 percent, Treasury data showed.

The budget deficit during this period amounted to 3.8 percent of GDP, up from 2.7 percent year earlier.

Total revenue and grants grew 7.49 percent year-on-year to Rs. 307.7 billion while expenditure grew more than thrice as fast as revenue growth, up 29.43 percent from a year earlier to Rs. 593.5 billion.

Tax revenue grew 10.7 percent to Rs. 276.5 billion while recurrent expenditure grew 23.6 percent to Rs. 445.4 billion and public investment grew 46.6 percent from a year earlier to Rs. 152.4 billion.

"The first four months outcome reflects the impact of revenue lags and expenditure leads and higher revenue and moderation of expenditure is expected in the second half of the year. Hence, the fiscal operations in the year as a whole are expected to remain consistent with the targeted deficit of 6.2 percent of GDP. The measures taken to provide support for local industries such as the reduction of duty waiver on milk powder imports, increase of Special Commodity Levy (SCL) on sugar etc. in the wake of declining commodity prices in the international market that required local economy safeguard and commitment controls are conducive for fiscal consolidation," the Treasury said.

"The Government was able to mobilize US$ 608 million as gross project related loans during the first four months of 2012 compared to US$ 382.5 million received during the same period in 2011," it said.

Foreign financing of the deficit, including Treasury bills and bonds, grew 407 percent from a year earlier to Rs. 86.98 billion during the first four months of this year. Financing from the banking sector grew 104 percent to Rs. 131.9 billion while financing from non-banking sources fell 26 percent to Rs. 66.8 billion.

Revenue…

"The government revenue during January?May 2012 period amounted to Rs. 386,655 million recording a 9.1 percent increase over the corresponding period of 2011. Tax revenue increased by 11.9 percent to Rs. 353,314 million while non tax revenue reflected a decline of 13.4 percent to Rs. 33,341 million," the Treasury said.

"An improvement in revenue from international trade related taxes such as Special Commodity Levy (SCL), Ports and Airports Development Levy (PAL) and Value Added Tax (VAT) on imports was observed in the first five months of the year due to improved performance in imports.

"The revenue from Excise duty also recorded a moderate growth during this period with the increase in the taxes on liquor, cigarettes and tobacco and the enhanced demand stemming from the improved tourism related activities, new markets in Northern and Eastern provinces, the increase in motor vehicle imports as well as increase in applicable Excise (Special Provision) duty on motor vehicles, three?wheelers and motor bicycles at the end of March 2012 and the depreciation of the rupee against major foreign currencies during this period.

"Meanwhile, the income tax revenue grew at a higher rate with the better performance in corporate and noncorporate taxes and withholding tax. The revenue from Pay?As?You?Earn (PAYE) tax indicated a decline reflecting the impact of rate reductions and the concessions that have been granted on it," the Treasury said.

Salaries and Pension Cost

"The government spent Rs. 112,114 million on salaries and wages of public servants during the first four months with an increase of 4 percent over the corresponding period of the previous year. This was due to the increase in the special allowance by 10 percent of the basic salary of public servants of non staff category and 5 percent of the basic salary to staff category from January 2012.

"The expenditure on pension payments increased by 15 percent to Rs. 37,133 million. This was mainly due to the full impact of 22,773 of new retirees in 2011 and partial impact of 8,100 new retirees in the first four months of 2012. The increase in pension payments by Rs.500 to those who retired before 01.01.2004 and by Rs.250 to the pensioners retired during the period between 02.01.2004 and 31.12.2006 also contributed to this increase."

Interest Cost....

"Interest payments on foreign and domestic debt amounted to Rs. 173,651 million with a 22 percent increase over the corresponding period of last year. The increase in domestic market interest rates on government securities and the depreciation of the rupee against major foreign currencies, which increased the interest payments on foreign currency denominated debt, were the major reasons for this increase."

Welfare Payments...

" The expenditure on welfare payments and subsidies of the government in the first five months of the year totaled at Rs. 32,028 million. This is a 20 percent increase over the same period in 2011. The government continued to provide welfare assistance addressing the hardships faced by the poorer segments of the society including Samurdhi relief, flood and drought relief and meals and dry rations to internally displaced persons spending Rs.4,242 million. The service compensation to injured and dead soldiers increased to Rs. 6,107 million during this period from Rs.5,499 million of the previous year.

"The Nutritional Intervention Programmes carried out by the government to improve the maternal and child health care such as "Poshana Malla", Thriposha programme, fresh milk programme and school nutrition programme continued in 2012 costing Rs. 1,383 million. Expenditure on the Poshana Malla programme to provide a nutritional food package to expectant mothers was Rs. 87 million while the total cost born on school nutrition programme was Rs. 857 million. The Ministry of Health spent Rs. 544 million on Thriposha programme and Rs. 28 million was spent to provide fresh milk for children between 2?5 years. World Food Programme was continued at a cost of Rs. 463 million during the corresponding period.

"Ensuring the provision of free education to all school children, the government expenditure on providing free school text books, uniforms, season tickets and free dharma school books, bursaries increased to Rs. 3,083 million for the period of January to May from Rs. 2,234 million in the previous year. The government policy decision to expand the fertilizer subsidy programme to any crop increased the relevant spending to Rs 16,071 million. This is an increase of 35 percent over the corresponding period of the previous year," the Treasury said.

Borrowings…

"The government debt operations indicated a total gross borrowing of Rs. 556.1 billion during the first five months of 2012. The repayments of government debt, both domestic and foreign, amounted to Rs. 283.8 billion thus limiting net borrowings to Rs. 272.2 billion during this period," the Treasury said.

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