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coronavirus
Coronavirus
VERY HIGH
Source: covid.gov.pk
Pakistan Deaths
29,137
1524hr
Pakistan Cases
1,386,348
5,19624hr
Sindh
531,008
Punjab
467,698
Balochistan
34,032
Islamabad
120,813
KPK
186,537

The budget 2020-21 is, at best, a work in progress - more so than previous budgets reliant on an over dose of optimism including the two preceding budgets presented by Dr Hafeez Sheikh during the Khan administration – budgets which subsequently required a careful balancing act between the International Monetary Fund’s (IMF’s) insistence on meeting the agreed time-bound conditions/structural benchmarks and the cabinet led by Prime Minister Imran Khan clamouring for relief for their constituents.

One major uncertainty is whether the ongoing talks on the sixth IMF review will be successful or suspended pending the achievement of the budgeted targets in the first quarter (July-September) 2021 particularly in the decades’ long poorly performing tax sector. The tax target cited in the second to fifth review IMF documents for next year agreed in February 2021 (published in April 2021) was 5963 billion rupees close to the budgeted target of 5829 billion rupees however there are reported differences on the proposed budgeted taxation measures no doubt based on past failures to generate revenue from these sources.

The 2021-22 budget envisages generation of a trillion rupees of additional revenue next year sourced to: (i) 196 billion rupees from sales and federal excise taxes through tax measures including generating 38 billion rupees from imposition of sales tax on crude oil (which will raise prices across the board as would the budgeted 610 billion rupees from petroleum levy) and incentivizing consumers through a system of large prizes on sales tax receipts. This latter measure has been very successful in some countries though it is unclear whether the same success rate will be applicable in Pakistan and, more relevantly, be achievable within one year; (ii) an additional 58 billion rupees from income tax measures including 20 billion rupees from monitoring of withholding taxes, taxing domestic consumers with electricity bills in excess of 25000 rupees per month but not on the active tax payers list as well as through reorienting the tax machinery and extensive use of information technology; this has been budgeted since the Zardari-led PPP government however its success has been very limited; (iii) 10 billion rupees more from customs duties (an amount that may rise if imports rise); (iv) 242 billion rupees through enforcement measures against 200 to 250 billion rupees budgeted last year and 200 billion rupees budgeted in 2019-20; disturbingly repeated attempts by Business Recorder to ascertain whether these targets were achieved remain unanswered by the Federal Board of Revenue which raises legitimate questions; and the (v) the remaining 500 billion rupees would be sourced to a GDP growth rate of 5.7 percent - a risk as acknowledged in the budget documents which stipulate that if Covid-19 blows out of proportion “fiscal forecast may change slightly or substantially depending upon the severity of the pandemic. Resultantly the economic growth will be impacted with reduction in revenue.”

Any delay in the IMF review would have obvious implications on the disbursement of the projected 496 billion rupee budgeted IMF support for next year but, more importantly, it would have implications on lending by other multilaterals/bilaterals who get a comfort level from a debtor country’s adherence to a Fund programme as well as raise the government’s borrowing costs from: (i) external commercial sources budgeted at 779 billion rupees, and (ii) bank borrowing (treasury bills, Pakistan Investment Bonds, sukuk) budgeted at 681 billion rupees.

Factors contributing to the observation that the budget 20201-22 is a work in progress include four elements – one positive and three negative.

Finance Minister Shaukat Tarin soon after the budget speech stated on a private channel that talks are at an advanced stage on the Saudi oil facility, not factored in the budget documents, adding that the Pakistan government is merely negotiating the amount and interest payable on this facility. This would certainly add to revenue and reduce the pressure on foreign exchange reserves.

The Annual Budget Statement documents highlights three risks related to revenue generation. First power sector losses notably continuation of flow of energy sector losses and nonpayment of arrears and liabilities (existing circular debt has reached a high of 2.3 trillion rupees) would impact the fiscal forecasts – a risk which “may impact government’s fiscal position if such arrears and liabilities are required to be paid through the budgetary process.” The IMF is reportedly insisting on rate rises as agreed in February 2021 given that past pledges to usher in reforms, eliminate the circular debt and improve governance spanning decades were never implemented; however the government has refused to adhere to its earlier pledge based on a credible assumption that any raise in electricity rates would have negative implications on productivity and compromise the kitchen budget of average income householders. Its pledge that this time reforms would take place in letter and spirit pose a challenge for the IMF given the fact that the Khan administration is at the tail end of its third year in power.

Second, budget surplus of provinces is projected at 570 billion rupees against 242 billion rupees budgeted last year (revised estimates have not been shared in the budget documents) but the Annual Budget Statement acknowledges the risk while maintaining that the government has formed the tenth National Finance Commission (NFC) award with the “view to deliberate on options leading to fiscal harmonization. In the context of fiscal risk, excessive spending by the Province and low generation of own source incomes and revenue may lead to fiscal adjustment.” The seventh NFC award was unanimously approved when Shaukat Tarin was the finance minister in 2010 with Punjab at the time agreeing to multiple criteria reportedly after President Zardari agreed to amend the constitution to allow Nawaz Sharif to become prime minister for the third time. This time around Zardari-led Sindh is likely to oppose any proposed change though one assumes the federal government may link changes to the award to the offer of a higher development outlay for the province in the Public Sector Development Programme.

Finally, state-owned entities (SOEs) are supported through guarantees, grants, loans, equity investments with outstanding guarantees at present at 5213 million dollars (the equivalent rupee rate has been determined at 153 rupees to the dollar which is already an underestimation) with the lion’s share given to the power sector accounting for 83 percent followed by aviation at 8 percent. If losses continue Annual Budget Statement acknowledges “fiscal forecasts” will be impacted but added that a legal framework to improve governance has been placed in parliament for approval and it has initiated the requisite work to gauge the performance of SOEs to decide whether to sell, liquidate or retain them. Needless to add, such plans were made by previous administrations and after requisite cabinet and Council of Common Interest approval they were shared with the International Monetary Fund (IMF) but were not implemented. The Khan administration continues to face scathing criticism of poor governance in general, including in SOEs, and this is in spite of the fact that Dr Ishrat Hussain headed the task force on improving governance as soon as the Pakistan Tehrik-i-Insaaf government was formed in 2018, however three years later, there has been no visible improvement.

No reliance on trickle-down theory Tarin stated in the budget speech though he has extended fiscal incentives to the manufacturing sector to sustain the growth momentum in the economy (usual practice for trickle-down theory adherents). And he has budgeted 266 billion rupees out of the total 682 billion rupees budgeted subsidies (39 percent) for payment to Independent Power Producers.

Ehsaas programme the government’s major initiative for social protection and poverty alleviation, and one would assume the alternative to reliance on the trickle-down theory, is budgeted 250 billion rupees in 2021-22 against 200 billion rupees in the outgoing year; however, without supporting poverty data the allocation cannot be appropriately evaluated.

The middle class – low and middle income earners – however will get little from this budget other than loans of around 500,000 rupees at zero interest rate, lower taxes on domestic assembled cars/motorbikes, etc. The budgeted pay raise of 10 percent will not cover the inflation for the two years 2020-21 (9 percent) and 2021-22 (projected at 8.2 percent).

Copyright Business Recorder, 2021

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