Federal finance minister Shaukat Tarin has infused some optimism in the management of the economy with his gung-ho two-pronged approach: growth and inclusive growth – not as two sides to the same coin but distinct as they are to be achieved through two different policy thrusts.
Growth in the current year is to be achieved through a further extension of the Covid-19 mitigating policies widely believed to be the reason behind the inconclusive sixth review talks with the International Monetary Fund (IMF). This implies: (i) maintaining the discount rate of 7 percent against 13.25 percent July-March 2019-20; (ii) in recent weeks the rupee dollar parity has risen to over 159 rupees from a low of 152 rupees in May 2021. Market players attributed the 152 rupee parity to State Bank of Pakistan (SBP) interventions which, they now maintain, may have been abandoned this month with the objective of meeting the Fund’s concerns by September, the scheduled month for the deferred sixth review talks. SBP, however, would argue that the rupee erosion is due to disorderly market conditions which given the claim of over 18.2 billion dollar foreign exchange reserves, albeit more than half from debt equity and swap arrangements, maybe a challenge to support; and (iii) fiscal incentives to productive sectors to continue, which as per available 2021-22 budget documents consist of at least 93 billion rupees including: (a) 20 billion rupees under grants/transfers of drawback of taxes DLTL, (b) zero-rated industrial subsidy of 26 billion rupees, (c) industrial support package of 15 billion rupees, (d) Rs 22 billion to KE under the same industrial support package, and (e) subsidy to LNG sector for providing gas at lower rates to industry 10 billion rupees.
Not quantified is the impact on the circular debt of the decision to freeze the base electricity rates. These pro-industry incentives are envisaged as a major contributor to the projected growth of 5 percent this year which together with inflation of 8.2 percent is estimated to raise tax collections by 621 billion rupees.
Concurrently the budget would ensure the elite – the wealthy undocumented non-filers particularly retailers – begin to pay due taxes with the budget projecting 242 billion rupees through enforcement measures – a figure cited in previous years but never realized. To make this even more unrealistic this figure has been raised by 100 billion rupees to 342 billion rupees subsequent to the 100 billion rupee relief in the budget measures announced by the government in response to suggestions/recommendations by parliamentarians and pressure groups. Be that as it may, the revenue from enforcement measures would not be generated through audit by Federal Board of Revenue (FBR) officials as in the past but through third party audit. One would hope that the private accountancy firms are carefully selected by the government to ensure that there are no subsequent allegations of nepotism/corruption.
Inclusive growth is to be achieved through government sponsored cards/schemes budgeted at 306.3 billion rupees ranging from: (i) Benazir Income Support Programme (budgeted 246 billion rupees); (ii) Baitul Mal (4.2 billion rupees); (iii) subsidy to Naya Pakistan Housing Authority (30 billion rupees); (iv) mark-up subsidy to Naya Pakistan (3 billion rupees); (v) credit guarantee scheme for small farmers (100 million rupees); (vi) Kamyab Jawan programme/Kissan programme (10 billion rupees); (vii) Small and medium enterprises risk sharing facility (5 billion rupees); (viii) Covid tax loan guarantee scheme (5 billion rupees); and (ix) refinance and credit guarantee scheme for collateral free lending to SMEs (1 billion rupees).
Social protection not elsewhere classified is budgeted 252.4 billion rupees. If this is in addition to the 306.4 billion rupees then a total of 559 billion rupees is to be disbursed to the poor and vulnerable to ensure inclusive growth. Given that total budget outlay is 8487 billion rupees the amount for inclusive growth, given that 40 percent of people in this country are living below the poverty line, is a low 6.5 percent; and if the 252.4 billion rupees are also elsewhere classified, as feared, then inclusive growth is earmarked only 3.6 percent of total outlay.
The question is if this is the right way to go forward? The government needs to begin to focus on the percentage below the poverty line rather than on the amount it allocates for its inclusive growth programmes to assess if it is making a difference.
Second, the government has to convince the IMF that its policy matrix has paid dividends during the first quarter. Failure would mean at best inconclusive talks and at worst suspension of the programme that in turn would send a message to multilaterals and bilaterals that Pakistan has abandoned its reform agenda leading to a cessation of concessional inflows. The pressure on the rupee would rise and borrowing costs in rupee terms to pay off past loans and interest payments on Eurobonds/sukuk would rise significantly; unless of course China in marked departure from its global policies decides to write off previous loans and/or does not seek sovereign guarantees for projects under the China Pakistan Economic Corridor.
It is the projected negative fallout of IMF programme suspension on the economy that no doubt prompts Finance Minister Shaukat Tarin to insist that the government has no intention of abandoning the Fund programme and that in the event of the budgeted targets not being achieved there are alternatives that would shore up shortfalls, if any. It is not clear whether this would entail scaling down the social sector programme; or the public sector development programme budgeted at a high of 900 billion rupees (rightly regarded as an engine of growth in this country) which in turn would have repercussions on the growth rate and thence on the envisaged growth in FBR collections; or a mini-budget (higher taxes); or eliminating the incentives to the industrial sector.
To conclude, there is many a slip between the cup and the lip and while the government’s policy thrust appears to be an attempt to allocate to sectors/subsectors to ensure growth as well as inclusive growth yet the task is truly herculean and must be recognized as such.
Copyright Business Recorder, 2021