EDITORIAL: Prime Minister Imran Khan in his televised interaction with the general public by telephone on Sunday stated that his administration has completed a fresh survey of Ehsaas programme and decided to give a comprehensive relief package to 40 percent of the population through targeted subsidies. It is unclear how much of this subsidy would be written off against some other budgeted outlay or be in addition to the 8.48 trillion rupee outlay that would exacerbate the budget deficit which, in turn, would have severe implications on the rate of inflation.

The Prime Minister’s statement reveals two very disturbing facts. First, the survey evidently revealed 40 percent of the population is under the poverty line, and therefore eligible for subsidy – a rate supported by the World Bank which, using the lower-middle income poverty rate, estimated that the poverty ratio in Pakistan stood at 39.3 percent in 2020-21, projected to remain at 39.2 percent in the ongoing year – a rate that may come down to 37.9 percent by the election year 2022-23. The Economic Survey 2017-18 noted that the percentage of those living below the poverty line fell to 24.3 percent in 2015-16, which ironically was sourced to the Benazir Income Support Programme (a major component of the existing Ehsaas programme); however, the 15.7 percent rise in just six years can partly be attributable to the severely harsh International Monetary Fund (IMF) conditionalities implemented from May 2019 to March 2020 and partly to the pandemic especially after consistent claims by the government that it resorted to “smart” as opposed to “complete” lockdown to contain the virus.

Secondly, and perhaps more disturbingly, it indicates that the administration is focused on outright subsidies to contain inflation - an objective that would be severely compromised because of the very limited fiscal space - rather than undertaking appropriate monetary and fiscal policies that are used by governments around the world to contain inflation. The sale of Pakistan Investment Bonds, treasury bills, sukuk/Eurobonds, defined as debt equity as it requires payment of interest plus the repayment of the principal on maturity, rose from 16.5 trillion rupees inherited by the Khan administration to over 25 trillion rupees today – a historic rise of over 51 percent in just three years. This is a highly inflationary policy and requires an urgent revisit. The budget for the current year notes that while permanent debt was 864 billion rupees in last year’s revised estimates, in the current year it is budgeted to rise to 1.97 trillion rupees – a rise of nearly 44 percent in just one year.

Major source of government tax revenue remains indirect taxes, whose incidence on the poor is much higher than on the rich. In the budget for the current fiscal year 62.5 percent tax collections are to be sourced to customs/federal excise/sales tax (in total terms 3.6 trillion rupees) while the remaining 37.5 percent (2.18 trillion rupees) is to be collected from direct taxes (though as withholding taxes in the sales tax mode have not been identified, therefore, this is in all probability an overstatement). Ironically, in last fiscal year the reliance on indirect taxes as per the budget documents was 58.8 percent (2.92 trillion rupees), or lower than in the current year. Reforms in the tax structure therefore remain pending and one can only hope that the government turns its attention away from total collections to a structure that is more fair, equitable and non-anomalous. Under the head of other taxes, the largest single source of revenue is the petroleum levy (PL), with an almost immediate impact on perishables that form the bulk of the budget of the poor. Last year, it generated 450 billion rupees, from 260 billion rupees in 2019-20 or a rise of 73 percent while in the current year the rise is envisaged at 610 billion rupees (a rise of 36 percent). It is important to note that this revenue source has political implications and may have to be tempered by reducing the levy.

We, therefore, appreciate that while the Prime Minister’s heart is certainly in the right place given his desire to insulate the poor from inflation yet to achieve sustainable low inflation he needs to begin to use the available economic policy tools at his disposal.

Copyright Business Recorder, 2021

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