Finally, the budget number are locked in after umpteen rounds of negotiations. Yet nothing is really locked in for the next year. The budget numbers to be presented on 12th June are probably finalized; but subsequent alterations are very much on the cards. The IMF is still and understandably in the process of review.
The budget deficit target for FY21 is to be set at 7.1 percent of GDP with primary deficit target of 0.4 percent. FBR revenues are to be set at Rs4.9 trillion. All the parties know that this is subject to mid-year revision and so is the fate of deficit. There is not going to be a salary increase, apart from probably a token increase for junior staff.
Talks with the IMF are ongoing. Earlier, the IMF was asking for Rs5.1 trillion tax target, while the FBR was talking about Rs4.7-4.8 trillion. Realistically, Rs4.5 trillion seems the upper limit based on the fact that no new taxes are to be imposed and the COVID spread to continue in the first quarter of the next fiscal year. There seems to be a soft understanding to revise FBR revenue target down to Rs4.5 trillion in a few months.
There is not much that can be done to control expenditure. The military and bureaucracy wanted 20 percent rise in salaries and pension bill. They are the beneficiaries and they want the hike; but there is no space. The IMF took the exception and is not even allowing a 10 percent increase. Now the consensus probably is for no blanket increase and some token jump (5-10%) for junior staff.
The government is keeping Rs360-370 billion COVID related stimulus for the next year. Defence budget is likely to be tied to the nominal GDP. This would imply around 10 percent growth. Government is saying that it will take steps to control expenditure to compensate for any shortfall in FBR revenues. This is easier said than done.
Ministry of Finance is relying on the SBP for saving grace on expenditure. The debt servicing target is based on current policy rate and there could be some potential gain on that front, if monetary policy committee decides to lower rates further. In the outgoing year, 1 percent decline in interest rates lowered the annualized debt servicing cost by Rs120 billion (against the myth of Rs250-300 bn). In the next fiscal year, savings could be higher as there are some long-term bonds maturities due.
Federal PSDP is to set at Rs700 billion, with Rs630 billion worth of projects finalized. Rs 70 billion is to be kept in block allocation. Last year, the budget was Rs700 billion and the utilization would be around Rs550 billion. There was some development sought last year in public private partnership; but not an iota was spent on it. No thanks to NAB and other accountability fear. Next fiscal year the zest to spend on PPP would exist, but numbers may not reflect anything significant.
It seems that there is an agreement on not revising energy prices anytime soon. The circular debt reduction plan was the bone of contention with the IMF on delay in second review in pre-COVID times. The plan is of zero build up in circular debt. But without increasing tariffs, reducing losses/making DISCOs liable, renegotiation with IPPs and other power generation companies, one may wonder how the circular debt will reduce. Like many other elements, the plan is well in the air.