EDITORIAL: Federal Finance Minister Shaukat Tarin pledged to implement a bottom-up approach as opposed to the trickle-down theory which, he rightly added, has not yielded results in the last 72 years. The budgetary measures designed to achieve the bottom-up approach are five-fold. First, an ever-rising allocation for Benazir Income Support Programme (BISP) as well as widening of the Ehsaas programme. This programme has been appreciated both domestically and internationally; however, the fact remains that the budgeted amount, based on Pakistan’s severe resource constraints, is not enough to meet the growing numbers being pushed below the poverty levels (due to the pandemic and inflation projected at 8 percent next year) and the amount allocated per family of around 2500 rupees per month is highly inadequate to meet the needs of an average family of 6 with food inflation in double digits. Second, small interest-free loans with the objective of breaking the existing hold of the aarhtis on the poor farmers. One would hope for success in the implementation of this policy though in the past, interest-free loans for poor farmers were hijacked by the rich farmers without and, on occasion with, the bankers’ complicity. Third, collateral-free lending to small and medium enterprises (SMEs) with a budgeted allocation of 12 billion rupees; given the SMEs contribution of over 50 percent to total industrial GDP, 12 billion rupees appears to be a drop in the ocean. Fourth, extension of the special incentive package to the construction sector (inclusive of the amnesty scheme that maybe regarded as violative of the recent Financial Action Task Force action plan for Pakistan) to ensure that daily wage earners remain gainfully employed.
Finally, refusal to raise base electricity tariffs, exclusive of fuel component adjustment charges and quarterly reviews, effective 1 June, 2021 though the government has reportedly agreed to raise rates in September when the sixth and seventh quarterly International Monetary Fund (IMF) reviews are scheduled. However, the government has passed a bill enabling it to impose up to 10 percent surcharge on electricity. The rationale provided by the Finance Minister for not raising base rates was that any rise in tariffs today would stifle growth though he has not dwelled on the impact of the rate rise in September on the projected 5 percent Gross Domestic Product (GDP) growth which is budgeted to achieve over 500 billion rupees additional tax revenue next year.
The Finance Minister has repeatedly stated that refusal to implement the politically challenging IMF conditions agreed by Pakistan in February 2021 does not imply that Pakistan is considering suspending the Fund programme and instead an alternative plan has been presented to the Fund which would be demonstrated in the next two to two and half months given that the next IMF review date is early September.
Our fear is that the government may not be able to abide by what it is saying publicly and may be compelled by force of circumstance to pledge what the Fund has asked for; a not too unusual stance taken by previous administrations (though this is not applicable on all deferrals specifically delay in raising electricity tariffs). It is important to note that Train has publicly acknowledged that revisions/alternatives proposed by the government would have to be “demonstrated” before the next scheduled review which however is a tall order for three reasons. First, Pakistan’s economy remains fragile reliant on massive borrowing indicated by the recent cabinet approval to issue sukuk on major public sector infrastructure. Second, the FATF’s decision to keep Pakistan on the grey list would have implications on the cost of external borrowing and in this respect, it is relevant to note that the pressure on foreign exchange reserves may rise with a consequent negative impact on the rupee value. True, this is unlikely to impact on deals with respect to China and the Saudi reported offer to provide oil facility though the deal has still not been made public leading one to conclude that its modalities have not yet been worked out. It is also important to note that our borrowing costs would rise with a consequent impact on debt servicing and therefore on the budgeted deficit. And finally, without a check on inflation, budgeted at 8 percent next year which independent economists maintain would be in double digits, especially food inflation, pressure from the general public may rise and if does, unless addressed may result in organised protests that would disrupt economic activity.
That the pressure on the economy is from all angles, domestic and external, is a fact. Therefore, Shaukat Tarin would have to get all the provinces on board and convince the influential people and the general public to sacrifice for yet another year while satisfying the bilaterals and multilaterals that the country remains embarked on a reform agenda.
Copyright Business Recorder, 2021