Actualizing budget targets

ARTICLE: The task of preparing a perfect budget is challenging in normal times. Today, when coronavirus is ravaging the world economy and uncertainty is at an all-time high, the task is even more difficult. In the face of instability and devastation facing Pakistan this year, the government has managed to prepare a budget that prevents over-burdening the population, while keeping the economy afloat. However, the projected revenue targets and GDP growth rate pose a serious challenge in terms of increasing the trade volume of Pakistan. There are measures that can be taken by the government to provide additional support to these areas, so that these targets become achievable and the economy is salvaged.

Pakistan has faced restrained activity in the last quarter, and now that COVID-19 is here to stay, there is additional pressure on the economy to stay afloat. The proposed federal budget for FY 20-21 projects a GDP growth rate of 2.1% for the upcoming fiscal year. To achieve this target, there are a number of industry concerns that can be addressed and a synergistic approach to economic growth.

The budget outlines a revenue collection target of $30.63 billion (Rs 4.9 trillion), which can surely be deemed achieved if a trade volume of roughly $79.6 billion (Rs 12.7 trillion) is targeted in the coming fiscal year. The table provides details of estimated trade and targeted revenue in accordance with the budget for FY 20-21.

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Year In Billion Dollars

              Total         Total      Total         FBR    Revenue/

             Exports     Imports      Volume     Revenue      Volume           ER

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2014-2015 23.67 45.85 69.52 25.57 37% 101.29

2015-2016 20.79 44.69 65.48 29.86 46% 104.24

2016-2017 20.42 52.91 73.33 32.17 44% 104.70

2017-2018 23.26 60.95 84.21 34.98 42% 109.84

2018-2019 22.99 54.69 77.68 28.13 36% 136.09

2019-2020* 19.80 40.87 60.67 22.42 37% 156.90

*July to May

**2020-21 27.07 52.55 79.63 30.63 38% ***160.00

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**Expected trade and revenue in 2020-21

*** Expected Average ER

The budget seems to simultaneously aim for the two objectives of lowering inflation and driving up economic activity. On one hand, it has outlined policies to reduce public expenditure as a means to counter inflation. At the same time, it implies that the impending recession due to COVID-19 calls for an expansionary fiscal policy. This policy aims for greater public spending, which drives up aggregate demand, generating employment opportunities and economic activity (PRIME Policy Note: Federal Budget 2020-21). These policies can therefore be readjusted to prioritize the goal of increased economic activity, while interest rates can be lowered to facilitate industries. These measures can go hand in hand to enhance the GDP growth rate and take the economy closer to its revenue target in the upcoming year.

Meanwhile, certain requirements of export-oriented industries should be given top priority. The country's Balance of Payments position can be greatly improved by means of a greater appreciation of the issues facing exports. As there is an expected 20% drop in remittances (the World Bank estimate) due to large scale layoffs in the Gulf countries, facilitating the Balance of Payments has become an even more pressing concern.

Holistic and substantial efforts are required to retain the textile industry's export earnings and maintain employment in a shrinking world market due to lack of demand. The textile sector remains under immense pressure to maintain Pakistan's export levels, and therefore must be considered a crucial aspect for Pakistan's economic survival. However, the industry remains burdened by extraordinary challenges, some of which are detailed below.

A high Sales Tax regime continues to serve as the most detrimental burden on the textile value chain. The withdrawal of the zero-rated regime along with a continued imposition 17% of GST together has resulted in a liquidity crunch for the entire export industry in the midst of a global recession. GST refunds serve as a hindrance by remaining in the pipeline for a period of 5 months. As a result, Rs 20 billion per month shifts from the coffers of the industry to the FBR, adding up to a whopping Rs 100 billion. This has increased the cost of doing business by about 6%.

Additionally, a GST of 17% provides a very high-level incentive to cheat, whereas a lower rate would allow proper documentation, increase FBR revenues through wider application and also allow organized domestic retailers to compete in the 13 billion dollars domestic textile market. It is thus essential that the government restores zero rating or reduces sales tax rate to 5% across the value chain. These measures would be a lifeboat for the industry in the face of an impending storm.

The next issue is 1.5 percent Turnover Tax/ Minimum Tax. This tax increases cost of exports by an average 5-6 percent as the tax is levied on the same goods multiple times as it passes through the value chain. The textile industry works on very slim margins and turnover tax acts as an accelerator to early closure of mills. Therefore, a continuation of 1.5 percent turnover tax in a situation where there will be no profitability is completely unjustified, and the budget should be amended to rectify this immediately.

Moving forward, a central concern that has been highlighted and underlined umpteen times is the need for regionally competitive energy prices. The export-oriented sector has given detailed reasons time and time again, for the provision of a fixed electricity tariff at 7.5cents/KWh and $ 6.5 per MMBTU for RLNG/gas across the value chain to ensure competitive export pricing. At this stage, the non-provision of competitive energy rates could lead to the direct closure of around 30 percent of factories within the coming six months.

Competing countries are already poised to combat highly competitive market conditions through cheap electricity and gas rates. Electricity prices in India have seen a further drop of 16% over the last 2 months while currently averaging about 7.2 cents/kwh for industry. Energy accounts for 35% of conversion costs in the textile value chain and therefore competitive pricing of exports is very highly sensitive to energy pricing. It had been agreed that Rs 20 billion will be allocated for energy for use in maintaining 7.5 cents/kwh for electricity and $ 6.5/MMBTU for RLNG/Gas. The budget however only allocates Rs 10 billion for RLNG.

Pakistan's dominant textiles sector has primarily been producing short staple fiber raw cotton with very high trash content and very high moisture content, while the world moves forward with a focus on synthetic fibers, the demand for which has grown exponentially owing to the convenience it affords. More than 60% of world textile trade is in MMF materials.

This brings us to polyester staple fiber. The budget was expected to cater to this very pressing need, but it unfortunately revealed no alteration in the 7% customs duty on the import of polyester staple fiber. This racks up the total import expenses in the range of 20% including antidumping duty. Polyester staple fibre is a raw material of the industry and as repeatedly committed by the government should not be subject to any duties.

Any protection to domestic polyester plants may be given directly by the government and not at the cost of our country's economic future.

Pakistan's duty and tax remission for export (DTRE) program is highly inefficient, as it can take two to four months to import synthetic fibers, leading to delays and uncertainties in production that are not acceptable to global buyers. This brings us back to the question as to why all inputs to textiles are not zero-rated.

Another concern that needs acknowledgement is that of the DLTL - a calculation of the government taxes component in the cost of exports which has served to weaken the country's export competiveness. With refunds of approximately 5 percent due on $10 billion exports, the amount of DLTL due will be Rs. 80 billion. This was also the amount requested for allocation by Ministry of Commerce. Meanwhile, the budget has allocated only Rs. 10 billion for DLTL, which is not sufficient to cover the cost. The TUFF scheme falls in a similar category. Rs. 4.5 billion is pending under the TUFF scheme whereas the amount allocated for it in this budget is only Rs. 400 million. These amounts have been due for the past 7 years. It is hoped that these concerns will finally be addressed.

We support and appreciate measures by the government to facilitate industry, as well as the economic policies outlined in the budget which ease the financial burden due to the pandemic and as partners in the economy would do all that is necessary to actualize the stiff fiscal and economic goals as achievements. An acknowledgment of the critical issues highlighted in this article would not only make the ambitious revenue and growth targets achievable but would additionally prevent over one and half million people from losing their jobs and save the industry from contracting by 30-40 percent.

In final analysis to sustain employment and a brighter future, we have to work together through collaborative measures for a prosperous Pakistan.