EDITORIAL: The World Bank in a report by its Independent Evaluation Group maintained that pro-cyclical fiscal policies in Pakistan due to internal political crisis widened the fiscal deficit in 2017-18, adding that "the adoption of a new programme with the International Monetary Fund was delayed for more than two years, until summer 2019, when the Government of Pakistan had completed a credible new effort to get the fiscal situation under control."
A scheduled election in any fiscal year has presaged a dramatic rise in expenditure that in many years has been channeled through parliamentarians, both from the ruling party and coalition partners, with the overarching objective to win the elections, though not always with success. This syndrome was evident before the 2008 elections with the Mushrarraf- led government subsidizing the oil price rise that reached a historic high of over 140 dollars to a barrel in the international market and which contributed to a budget deficit of over 7.3 percent. In 2010, the PPP-led government abandoned the power and tax sector reforms due to political considerations leading to IMF programme suspension and left a deficit of over 8 percent for its successor - the PML-N. And in 2017-18, the Shahid Khaqan Abbasi-led government deferred the decision to go on an IMF programme by plausibly arguing that the decision must be taken by whoever forms the government after the 2018 elections but that did not stop it from releasing billions of rupees to PML-N and coalition partner parliamentarians. At the same time the Abbasi-led government formulated a budget for 2018-19 which reduced tax rates with the rationale that this would fuel economic activity and thereby increase total collections. The budget deficit for the year is given as 6.5 percent.
During the two PTI years, the budget deficit has risen from 8.9 percent in 2018-19 to a whopping 9.1 percent as claimed in the government's budget documents 2020-21 but which is widely believed to be an understatement by at least a couple of percentage points. And this historically high deficit is at a time when the government is on an IMF programme. The reason, so argue the Pakistan's economic team leaders, is Covid-19; however, while the pandemic did contribute to the rise in the deficit yet as per the IMF the shortfall for 2019-20 due to this deadly virus was 2 billion dollars (which was met by the multilaterals) and for the current year a 1.6 billion dollar shortfall is projected, a not unreasonably high figure.
According to the Economic Survey 2019-20, tax-to-Gross Domestic Product ratio was 10.6 percent in fiscal year 2017, 11.1 percent in 2018, 10.8 percent in 2019, and though projected at 12.6 percent in 2020, based on unrealistic targets agreed between the IMF and the then newly-appointed economic team leaders on 12 May 2019, yet the revised estimates of the year are 9 percent. Covid-19 is being cited as the main reason for the government's failure to realize the tax target, however, with a projected growth rate of no more than 2.4 percent pre-Covid19 and the imposition of 17 percent sales tax on five leading export sectors GDP growth rate was not realized with a consequent negative impact on tax collections. In the past fiscal year, three chairmen of the Federal Board of Revenue (FBR) have been appointed which further compromised the capacity of the Board to generate revenue and last but not least the contractionary monetary and fiscal policy agreed with the Fund under the programme also contributed to negative growth in the Large Scale Manufacturing sector's output and therefore on tax collection.
Expenditure was allowed to rise to an unprecedented level last year - 23.8 percent of GDP against 21.7 percent the year before - with the IMF focus on primary deficit (excluding markup on debt) that fuelled the government's appetite for borrowing both domestically (domestic debt rose from around 16 trillion rupees to 23 trillion rupees by March this year) while foreign borrowing was to rise by 38.6 billion dollars in thirtynine months of the Fund programme starting 1 July 2020 as acknowledged by the Pakistan authorities on 1 July 2019. The goevrnment's claim of containing current expenditure by around 1.3 trillion rupees is largely attributable to zero foreign loan repayments this year against 1.24 trillion rupees payable last year as per the revised estimates.
The World Bank study, however, does not include the PTI years which erodes its relevance as the ongoing IMF programme design has been rightly criticized for the upfront conditions that have pushed a large number below the poverty line, which coupled with the inability of the government to provide for them due to paucity of funds, has implied a rising number below the poverty line.
Copyright Business Recorder, 2020