KARACHI: Growth in revenue collection outpaced the rise in current expenditures during the first quarter of 2017-18, according to a recent report by the State Bank of Pakistan (SBP).

Although growth in expenditure remained slower than that in revenue collection, it was significantly higher than last year, said the SBP report.

“Not surprisingly, current expenditures grew much sharply on account of higher spending on defence, maintaining public order and safety, interest payments, environment protection, etc.,” it said.

The revenue balance, which is the gap between total revenue and current expenditures, also shrank to 0.6 per cent of gross domestic product (GDP) in July-September from 0.7pc a year ago.

Collection grew 18.9pc during the quarter against a decline of 8pc last year. This recovery was spearheaded by a 22pc increase in tax collection by the Federal Board of Revenue (FBR).

Growth in tax collection by the FBR in the quarter was not only the highest in the last five years, but also broad-based, said the SBP report.

Collection of both direct and indirect taxes recorded over 20pc rise. “This rebound in tax collection allowed the FBR to double the amount of refunds to Rs51.4 billion during the first quarter compared to only Rs25.9bn in the corresponding period of last year.”

The SBP report said the FBR rationalised some of the tax incentives. For example, sales tax on retail sales of five export-oriented sectors was increased from 5pc to 6pc, import of commercial fabric was subjected to 6pc sales tax against the earlier zero-rated status, a concessionary duty on hybrid electric vehicles above 2,500cc was withdrawn and a 3pc tax credit to manufacturers making sales to registered sales persons was also withdrawn.

According to the report, the experience of previous election years shows that current expenditures typically jump in the run-up to the polls. Development expenditures gain some momentum in pre- and post-election years, it added.

“This year, however, development expenditure is expected to grow further from 2016-17, given the budgetary target set for 2017-18. The first-quarter data shows trends in development expenditure strengthened further, growing by 15.6pc on top of 12.4pc growth registered in the same period of 2016-17,” said the report.

The SBP said the government relied heavily on bank borrowing, which financed about 93pc of the fiscal deficit in the quarter. There was also a stark contrast in bank borrowing that was evenly distributed between the SBP and scheduled banks.

The situation was different last year when the government borrowed from the SBP not only to finance the fiscal deficit, but also to retire its borrowing from scheduled banks.

“The non-bank financing declined to Rs24.5bn in the first quarter while the same was Rs69.3bn in July-September 2017,” said the report, adding that external finance was only Rs7.9bn against Rs68.8bn a year ago.

Accordingly, debt accumulation was mostly due to an increase in domestic debt while external debt also increased notwithstanding the decline in external finance.

“This increase in external debt was also due to appreciation of international currencies against the dollar,” said the report.

Published in Dawn, January 21st, 2018