THE country’s fiscal deficit clocked in at 1.7pc of GDP during 1HFY16 as compared to revised 2.4pc in the corresponding period last year. During the 2QFY16, the deficit dipped to just 0.6pc of GDP due to a 25pc year-on-year increase in tax revenue collection.

A 6pc drop has been witnessed in non-tax revenues during the corresponding period while tax revenues have grown by 20pc, resulting in total revenue growth of 15pc.

On the expenditure side, apart from a double-digit rise in debt servicing cost (low base effect), most of the key heads in the current expenditure showed a nominal rise while the development expenditure augmented by a decent 28pc.

Given the better fiscal discipline in 1HFY16 and higher taxes on petroleum products and a one-off collection from tax amnesty scheme, it is expected that the government to come near its projected FY16 fiscal deficit target of 4.3pc, which in the past has been missed by a wide margin.

Nonetheless, the country still lags behind its potential tax collection due to key sectors being out of tax net, tax collection slippages and lower tax compliance (under reporting of income and a large undocumented black economy).

A recent report by IMF highlights that “Pakistan’s tax capacity is estimated to be 22.3pc of GDP, which implies a tax revenue gap of more than 11pc of GDP (Rs3.3tr)”. The government plans to increase the tax revenue-to-GDP ratio to 14.5pc by 2020, which is necessary if Pakistan is to avoid a debt trap, otherwise the development expenditure will be the first to suffer.

taha@alfalahsec.com

Published in Dawn, Business & Finance weekly, February 22nd, 2016