Extremely generous Eidi?

The budget 2021-22 can best be described as an extremely generous Eidi to the people of this country: 10 percent raise in civilian and military personnel salaries, minimum wage raised to 20,000 rupees, small interest free loans to urban and farm poor, cheap credit for housing, fiscal and monetary incentives galore to exporters/productive sectors (industry and agriculture), a rise in overall subsidies by 225 percent, a rise in targeted subsidies under the umbrella of the Ehsaas programme through existing and proposed issuance of cards ranging from Benazir Income Support Programme/cash disbursement, food coupons, farm inputs (seeds/fertilizer), the Sehat Sahulat Card and last but not least a pledge not to raise utility rates or petroleum prices. Unfortunately, the cost of the Eidi is to be borne by an Uncle getting progressively poorer, reflected by unsustainable budget deficits for the three years the Khan administration has been in power - 9 percent in 2018-19, 8.1 percent in 2019-20 and projected 7 percent in 2020-21. Next year's budget deficit is projected at 6.3 percent, which necessitates a rise in federal revenue of 21 percent (a challenge at best even if the projected 4.8 percent growth is achieved), a rise in non-tax revenue of 29 percent and a provincial surplus of 570 billion rupees - doubling from this year's budgeted surplus of 242 billion rupees with no revised estimates under this head.

The most obvious solution is heavier reliance on borrowing - from domestic and external sources. However with the government redefining relief as refusal to implement the time bound quantitative conditions and structural benchmarks agreed by former finance minister Dr Hafeez Sheikh, dismissed on 30 March 2021, and the incumbent Governor State Bank of Pakistan Dr Reza Baqir with the International Monetary Fund (IMF) there is a real danger that budgeted concessional sources of funds may dry up from multilaterals and bilaterals in the event that the Fund programme is delayed or suspended.

The 8.487 trillion rupee budget envisages: (i) a 20 percent rise in total external loans budgeted for 2021-22 - 2,747,792 million rupees against 2,286,859 million rupees in the revised estimates of this year. The total mark-up on foreign loans is budgeted at 302,506 million rupees against 239,568 million rupees in the outgoing year. Actual payables would depend on the exchange rate (which may well explain a thinly veiled warning contained in the Economic Survey 2020-21 that the country will follow an exchange rate regime based on economic fundamentals) as well as on reaching an agreement with the IMF in the ongoing sixth review; in the event that the IMF delays the review pending the delivery of the proposed alternative plan to the one agreed with the government in February 2021 then the government may have to rely on more expensive sources of financing including commercial borrowing whose reliance in the budget 2021-22 is disturbingly higher than in the current year - 779,200 million rupees against 762,335 million rupees in the current year. It is relevant to note that there is no budgeted oil facility from Saudi Arabia (in the current year or the next) or China safe deposits though 496 million rupees as IMF loan for budgetary support is included; (ii) estimated provincial surplus of 570 billion rupees next year against 242 budgeted surplus in 2020-21 appears to be too optimistic; (iii) non-bank borrowing (national savings and others) is cited at a whopping 1241 million rupees and details in the public account (net) reveal national savings of only 66,137 million rupees against the budgeted 223,279 million rupees in 2020-21 with revised estimates of 52,997 million rupees - a decline no doubt attributable to the pandemic, high inflation and no salary raise last year; the low budgeted amount next year indicates that the Finance Ministry is projecting high consumption next year that one hopes is not fuelled by inflation; (iv) permanent public debt mainly sourced to ijara sukuk (debt equity) is budgeted to rise from 437,410 million rupees in 2020-21 to 1,200,000 million rupees in 2021-22 - a rise of 174 percent whose contribution to debt servicing would rise dramatically in the event that the sixth IMF review is postponed or suspended; (v) privatization proceeds are budgeted to generate 252 billion rupees - an amount that appears optimistic as attempts to privatize identified state owned entities for the past four years have been unsuccessful due to multiple factors including organized workers resistance.

Ehsaas programme is budgeted to receive 260 billion rupees - a rise of 24 percent from this year but with no credible poverty data this rise cannot be used as a yardstick to show a decline in poverty levels.

Tax revenue is budgeted to rise to 5829 billion rupees, close to the Fund's target of 5963 million rupees target for the year. However, indirect taxes, whose incidence on the poor is greater than on the rich, are budgeted to generate 62 percent of total FBR revenue - a rise from 58 percent in 2020-21. And disturbingly petroleum levy, a primary source of inflation, is budgeted to generate 610 billion rupees - 3 billion rupees more than what is noted in the second to fifth IMF review documents.

The source of revenue, the Finance Minister noted, would be distinct from what was agreed in February 2021 with the IMF. New taxes on income would generate an additional 58 billion rupees while the February 2021 ordinance withdrawing exemptions/concessions now made part of the finance bill are projected to generate 80 billion rupee. Tax on consumption (sales and excise duty) is projected to have a net impact of 196 billion rupees.

The tax machinery would be reoriented to go after evaders, identify those out of the tax net and information technology would be used extensively to detect prospective tax payers - tax enforcement measures projected to generate 242 billion rupees. GST base will be expanded and incentivize consumers through a system of prizes on sales tax receipts, relax restriction on input tax adjustment and withdraw federal excise duty and reduce sales tax on locally manufactured cars, impose federal excise on mobile calls exceeding 3 minutes, internet data usage and SMS messages.

However what was perhaps the most disturbing aspect of the budget 2021-22 was the following statement no doubt endorsed by Shaukat Tarin in his capacity as the Finance Minister, the architect and erstwhile defender of the NFC award: "revisiting the NFC award. Moreover persuading the provinces to fulfil their funding commitments made at the time of the merger of the erstwhile FATA."

Copyright Business Recorder, 2021