EDITORIAL: Federal Finance Minister Shaukat Tarin while addressing the virtual seventh session of the United Nations Economic and Social Commission for Asia and Pacific (UNESCAP) stated that Pakistan resumed the International Monetary Fund (IMF) programme and is faced with a difficult choice between the need for fiscal consolidation and the ever-rising demand for an economic stimulus amid and post-Covid-19 scenarios.
Fiscal consolidation refers to policies designed to reduce the budget deficit which has remained unsustainable during the tenure of the present government – at negative 7.1 percent in 2018-19 (though the IMF’s second to fifth review report gives the figure of negative 9.1 percent), negative 9.1 percent in budget documents for 2019-20 though it was revised downward by less than a percentage point in August 2020 (the IMF cited negative 8 percent for the year) and has budgeted at negative 7 percent for the current year though independent economists claim it would be closer to negative 7.5 to 8 percent. Thus there is an imminent need to check the deficit and thereby reduce its implicit inflationary impact and reduce the need to rely on foreign savings (inclusive of loans from multilaterals/bilaterals/commercial banks abroad and incurring debt equity through swap arrangements, issuing Eurobonds/sukuk etc.)
This can be achieved through two possible measures. First, through raising tax revenue which, study after study has revealed is well below potential. Pakistan relies on low hanging fruit – industry and general public – as successive governments, including the incumbent, have failed to significantly widen the tax net. Industry contributes 18.3 percent to the GDP while its tax-to-GDP matrix is 70 percent, services sector accounts for 53.8 percent of GDP and its tax-to-GDP is 29.40 percent while agriculture accounts for 22.04 percent of GDP and has a 0.6 percent tax-to-GDP matrix. While agriculture is a provincial subject as per the constitution yet, unfortunately, no provincial government has increased collections under this head with critics arguing it is because the provincial assemblies, like the National Assembly, are heavily populated with big and absentee landlords. In addition, the present government raised petroleum levy payable largely by the common man – from 260 billion rupees last year to 450 billion rupees this year which now accounts for almost 8 percent of all taxes collected.
The Khan administration prepared a work plan last year in which it envisaged raising tax-to-GDP collections from services sector to 60 percent, industry’s contribution was to be brought down to 21 percent (which in turn would make it competitive domestically and internationally) and agriculture was to be raised by 19 percent. That plan has not been set in motion yet and while the pandemic was and remains a mitigating factor in last year’s budget yet one would hope that the forthcoming budget begins to undertake reforms that are premised on the ability to pay principal which essentially implies reliance on direct taxes and not as at present reliance on sales tax and withholding tax in the sales tax mode whose incidence on the poor is greater than on the rich.
As the Finance Minister rightly pointed out there is a need for a stimulus package that would fuel growth, which effectively implies a higher outlay for Public Sector Development Programme (PSDP). While it would be facetious to compare the Pakistan economy with the US economy however some lessons can be drawn from Jo Biden’s proposal to a joint session of Congress for a 1.8 trillion dollar stimulus infrastructure package on Wednesday. Pakistan’s PSDP projects suffer from one major flaw, namely they are chosen for political and not economic reasons. That needs to change. If the government undertakes projects on the basis of their internal and economic rates of return their positive outcome would be maximized. In addition, there is a need to increase the budgeted outlay for PSDP which has historically been slashed as and when the deficit reached the level of being unsustainable.
Thus if required it is the current expenditure that must be curtailed and this would require extremely bold and politically challenging decisions as that would pit the government against powerful pressure groups. In addition, pension reforms, streamlining the bureaucracy numbers and rationalizing and targeting subsidies would also be required.
The IMF in a report acknowledged that fiscal balances have worsened across the Middle East, North Africa, Afghanistan and Pakistan (MENAP) since the onset of the pandemic but added that Pakistan was one of the countries which covered more than 50 percent of its gross financing needs with domestic financing. Pakistan’s domestic debt as per the government data rose from 16.5 trillion rupees the Khan administration inherited in August 2018 to over 25 trillion rupees today – a rise of over 50 percent in just two years and eight months.
It is quite clear that Tarin is facing a lot more challenges than trying to find the right trade-off between fiscal consolidation and the need for a stimulus due to Covid-19 that would require him to convince the Prime Minister to take politically challenging decisions – a difficult decision for the Prime Minister as recent by-election results have shown that his political capital is dwindling.
Copyright Business Recorder, 2021