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Coronavirus
LOW Source: covid.gov.pk
Pakistan Deaths
28,280
1124hr
Pakistan Cases
1,265,047
66324hr
1.66% positivity
Sindh
465,819
Punjab
437,974
Balochistan
33,128
Islamabad
106,469
KPK
176,886

EDITORIAL: Finance Minister Shaukat Tarin faces multiple challenges in formulating the budget – economic and political challenges that are mainly associated with the conditions agreed by his predecessor with the International Monetary Fund (IMF) under the 6 billion dollar Extended Fund Facility programme that led to stifling of economic activity leading to low growth (1.5 percent projected for 2019-20) which was further exacerbated by the pandemic’s onslaught dating back to March 2020 (accounting for negative 0.4 percent by fiscal year-end). Demand remained severely curtailed in 2019-20 including petroleum and products consumption – a major source of revenue for the government thereby raising the budget deficit with its consequent negative impact on inflation.

Tarin has already announced that the budget would raise Public Sector Development Programme (PSDP), a major contributor to the country’s growth, to 900 billion rupees – a raise of 38.4 percent against the current year’s budgeted amount of 650 billion rupees. In this context, it is suggested that unlike the previous budgets the PSDP projects be selected on the basis of their internal and economic rates of return to maximize the economic benefits of the project. Previous administrations as well as the incumbent government launched PSDP projects that are based not on their rates of return but on the chief executive’s instructions and therefore were subjected to political as opposed to purely economic considerations.

He has also indicated that overall expenditure will be curtailed and with development spending on the rise one may safely assume that current expenditure would be curtailed. This approach is appreciated, however, Tarin is without doubt facing the challenge of how much to trim from where. Debt servicing and defence are two major components of current expenditure that he would have little if any latitude to freeze leave alone reduce in any meaningful capacity. Ehsaas programme, the Prime Minister’s signature programme, is also unlikely to face a cut especially as poverty levels have been rising due to the (i) pandemic with economic activity not yet bounced back to pre-May 2019 levels (prior to the launch of the IMF programme) after the easing of monetary and fiscal policies. Salaries (civilian and of defence personnel) are unlikely to be frozen second year in a row and there too Tarin would face a challenge as to how much he can contain a pay raise.

Thus, the finance minister’s priority would be to focus on rationalizing civilian expenditure, pensions, and subsidies which as per recent studies need to be more targeted towards the poor and vulnerable. While these are internal elements which allow some latitude to the Finance Minister yet there is the all important external factor that may turn his best laid plans, including out of the box solutions to dust: the withdrawal of the debt relief initiative granted by the G20 to help countries fight the pandemic for one year. Thus if around 1.2 trillion rupees is required to meet these external debt obligations next year then the demand for higher domestic revenue collection would be very significant.

Tarin has stated that the budget’s focus would be on raising the tax to Gross Domestic Product ratio. This again is a salutary objective but it would be preferable to focus not on raising total collections, as was the objective of all previous administrations as well as his predecessor’s, but to focus on documentation as a means to reach a steady rise in our tax-to-GDP ratio in years to come. He was the main architect of the National Finance Commission award 2010 and it is noteworthy that he projected a one percent tax-to-GDP ratio increase each year – a doable target that envisages a focus on documentation. One would therefore hope that he does not get waylaid by the Fund’s insistence on raising revenue to unrealistic levels. And finally, Tarin, the man who is credited with getting all parties to agree to the NFC award, and who retains his capacity to talk to all parties, may well face a revolt from within the PTI ranks that fear their re-election prospects unless there is growth in the economy that would reduce the unemployment and put increased income in peoples’ pockets.

Copyright Business Recorder, 2021

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