EDITORIAL: The budget for fiscal year 2020-21 was defined as a voluntary acceptance by the civilian and military establishment not to raise salaries, a sacrifice to be appreciated by the public, and there were to be no additional taxes with a rise in reliance on non-tax revenue relative to tax revenue.
Disturbingly, the containment of current expenditure from 7.618 trillion rupees in the revised estimates of 2019-20 to 6.344 trillion rupees in the current year is not attributable to lower defense and civilian government expenditure relative to the revised estimates of last year (military allocation was budgeted at 1.289 trillion rupees against the revised estimates of 1.227 trillion rupees while running of civilian government was budgeted at 476.7 billion rupees against the revised estimates of 2019-20 of 3445.8 billion rupees) but on zero budgeted outlay on foreign loans repayment in the current year against 1.245 trillion rupees in the revised estimates of last year. It is relevant to also note that there is ongoing serious debate amongst major donor countries to defer the repayment of loans by one year - from 31 December 2020 to 31 December 2021. In other words, next year's budget may also provide a reprieve for the government of Pakistan in terms of higher than expected cash flow however loans would then become due in fiscal year 2022-23.
Federal Board of Revenue (FBR) is asked to generate 4.963 trillion rupees in the current year against 3.9 trillion rupees in the revised estimates of last year - a target that appears to be unrealistic given the IMF's more credible projected one percent growth rate for the current year (though the government has again too optimistically put the rate at 2.1 percent); and inexplicably the budget envisages a rise in tax to GDP ratio to 10.9 percent against 9.4 percent claimed for 2019-20. Privatization proceeds are projected at 100 billion rupees for the current year, an unrealistic target which has been challenged by the IMF in its documents.
The thirtynine-month 6 billion dollar IMF's Extended Fund Facility programme began on 1 July 2019 and was originally scheduled for completion by October 2022, with ongoing delay attributed to Covid-19 and more recently to the Fund's discussions/engagement with the government of Pakistan on the implementation of 'prior' conditions to the second tranche release. Thus there may be an extension to the original completion date by half a year which would take the programme completion date to April-May 2023.
Thus repayments on foreign loans would become due in fiscal year 2022-23 as the EFF programme nears completion and in the Rapid Financing Instrument documents the Fund notes that "the maturity structure of debt is expected to improve thus lowering gross financing needs.... bilateral creditors have maintained their exposure in line with debt sustainability objective of the EFF." However, the design flaw in the EFF is its projection of public and external debt sustainability on two counts: (i) the domestic debt has risen dramatically from around 16 to 23 trillion rupees last year in just nine months (pre-Covid-19) and the extension in its maturity was at the time the discount rate was a high 13.25 percent; and (ii) the high contingent liabilities from loss-making State-Owned Entities and the lack of transparency in the context of power generation projects, which incidentally are under the umbrella of China Pakistan Economic Corridor and perhaps non-negotiable was highlighted though not adequately taken into account.
It may be recalled that federal cabinet members, including the Prime Minister, have insisted that the economy would be "out of the ICU" and on a growth trajectory by the time elections become due and that unfortunately may no longer be the case. Thus the major complicating factor for the PTI administration would be the general elections scheduled in 2023 which, if past precedence is anything to go by, presage massive disbursements to parliamentarians of the ruling party as well as key coalition partners with lower taxes and abandoning of the IMF supported reforms especially with reference to the power and tax sectors - issues that one would hope would come under discussion with the Fund.
Copyright Business Recorder, 2020
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