EDITORIAL: The Cabinet is expected to consider and approve today a draft finance bill envisaging not only the withdrawal of sales tax exemptions amounting to 330 billion rupees but also granting autonomy to the State Bank of Pakistan (an earlier draft approved by the federal cabinet, that reportedly has been amended after the Attorney General for Pakistan at the behest of finance minister Shaukat Tarin, explained to the Fund staff that some of the sought changes required amendment in the constitution and the government did not have the requisite two-thirds majority to amend the constitution) - a bill pending since 21 November when the IMF uploaded the Staff Level Agreement on the sixth review under the 6 billion dollar Extended Fund Facility (EFF) programme. There is no doubt that it’s approval by the cabinet and then from parliament is a challenging task premised on three existing disturbing facts.
First, the government is defining withdrawal of exemptions as an attempt to bring sales tax to the standard 17 percent on all items claiming that only the well-off people will be effected. This definition may need a revisit after cabinet approval as reports indicate that raw materials (including on pharmaceuticals) as well as baby food items are included in the draft proposal submitted by the Federal Board of Revenue. What should be a source of serious concern to the government is the fact that the continuing rupee erosion is adding on hundreds of billions of rupees to the budgeted mark-up on loans, which may well exceed the 330 billion rupees expected to be generated from withdrawal of exemptions – a rupee erosion that has continued in spite of the healthy foreign exchange reserves of over 18 billion dollars (mostly debt based), the 3 billion dollar Saudi Arabian loan parked with the State Bank for one year as well as 1.2 billion dollars deferred oil facility.
The consensus however is that the disbursement of the IMF tranche would be critical to: (i) check the perception of uncertainty in the market thereby arresting the unending rupee erosion – a critical objective of the government’s economic team leaders as the trade deficit has widened to 20 billion dollars in just five months (July-November 2021) which compares unfavourably with the 30 billion dollar trade deficit for 2017-18 that the Khan administration inherited accounting for a 20 billion dollar current account deficit; and (ii) to ensure that foreign borrowing (multilateral/bilateral) continues as also borrowing from the commercial banks abroad/issuance of Eurobonds/Sukuk is at lower rates given that the budget envisages external receipts of 1246 billion rupees (revised upward due to the rupee erosion).
Second, the year-on-year trend of the Sensitive Price Index (SPI) for the week ending 23 December 2021 released by the Pakistan Bureau of Statistics was 19.83 percent based on the prevailing assumption that any attempt to raise taxes would fuel inflation further makes resistance from within the cabinet a certainty, especially from coalition partners as well as those who joined the Pakistan Tehrik-i-Insaaf (PTI) just before or after the 2018 elections. This challenge maybe compounded in parliament. In the current political context it is baffling why a money bill over an ordinance was the IMF’s prior condition because if the attempt was to get a political consensus on these measures then the opposite seems to have been the outcome which was the writing on the wall: even greater divisiveness.
One would have hoped that the Fund would have supported meaningful changes in the tax structure – shifting from indirect taxes as a source of revenue to income tax based on ability to pay principle that would be for all times to come.
And finally, the component of the SPI that witnessed a major increase were Electricity (83.95%) and LPG (71.18%), (administered prices) and Cooking Oil 5 litre (59.93%), Vegetable Ghee 1 Kg (56.77%), and Vegetable Ghee 2.5 Kg (54.70%) reflective of not only their international prices but also the rupee depreciation. The government has already announced that it will further raise utilities tariffs, to achieve full cost recovery, rather than through improving sector efficiencies by implementing structural reforms.
Thus, any attempt to derail the approval of the bill in the cabinet and its passage in parliament at the present moment will be doing a grave disservice to the country’s already ailing economic health though one would hope that the government is forced to: (i) reduce the unprecedented rise in current expenditure - to 7.5 trillion rupees in the current year against less than 4 trillion rupees inherited by the Khan administration; and (ii) while the objective of free/cheap credit to farmers, small and medium enterprises and exporters can be supported for long-term growth (premised on the banking sector’s windfall profits made possible by procuring secure Pakistan Investment Bonds at rates well above the discount rate) yet at present, this massive injection of cash will almost certainly be inflationary. In addition, in the past such schemes failed as with no collateral required, the borrowers did not repay the amount which in turn led to reluctance of banks to meet the government’s stipulated credit targets.
Copyright Business Recorder, 2021