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EDITORIAL: Everything went according to the script: the cabinet approved the money bill with the coalition partners toeing the government line after their earlier reluctance not to approve it on a summary; the bill was tabled in parliament the same day and was vehemently opposed by opposition members.

And the projection is that it will be passed by the assembly with minor adjustments at best, with bargaining chips incorporated in the bill as is the norm, because given the current state of the economy it is imperative that all prior International Monetary Fund’s (IMF’s) sixth review conditions be met for failure would imply a significant rise in the cost of borrowing for the government.

That the government’s reliance on borrowing has reached unprecedented levels is evident from the fact that domestic borrowing has risen from 16.5 trillion rupees in August 2018 to over 27 trillion rupees today and to the country’s external borrowing that stood at 95 billion dollars at the start of PTI’s tenure, an additional amount, 42.74 billion dollars, has been borrowed so far by the Khan administration with around 10 billion dollars procured for budget support and the remainder to meet interest and repayment of principal as and when due.

Therefore, the entire amount under this head, contrary to the averments of the PTI government spokespersons, cannot be laid at the doorstep of previous administrations, particularly when the government extended the tenor of loans at a time when the discount rate was 13.25 percent.

The government has summarily dismissed opposition concerns that the money bill projected to generate 343 billion rupees will be inflationary citing its focus on withdrawal of exemptions on non-essential items and proposing the levy of 17 percent standard sales tax on 150 items while the opposition is claiming that some of the items are essential items, including dairy products while the levy on plant and machinery and cotton would negatively impact on output and therefore growth and employment. There is some merit in the two opposing arguments.

Sales tax is a tax whose impact on the poor is greater than on the rich but since ease of collection is the guiding principle of our tax strategy, this tax is the highest money spinner for the exchequer and imposed at a phenomenally high standard rate of 17 percent with little resistance due to the absence of any organised consumer rights pressure group. It is, therefore, critical to determine the objective behind the withdrawal of exemptions to assess the success of this politically highly controversial move.

Reports indicate that the FBR (Federal Board of Revenue) informed the cabinet that the International Monetary Fund (IMF) had set 700 billion rupee additional collections during the sixth review but the FBR managed to halve it to 343 billion rupees.

This is of great concern to this newspaper as it raises serious questions about the math which simply does not add up for three reasons. First, the projection of the impact of the removal of exemptions on the 150 items may be overstated by the FBR, as is not unusual, especially if a decline in sales due to additional taxes has not been factored in the calculations.

Second, the rise in revenue due to the withdrawal of exemptions would be grossly inadequate if the rupee continues to erode given that each rupee loss vis-a-vis the dollar adds 100 billion rupees to the budgeted mark-up which was calculated on the basis of 152 rupees to the dollar for the current year.

The government reckons that one billion dollar tranche release by the IMF would allay market uncertainty and the rupee will strengthen but it must be borne in mind that the: (i) 3 billion dollar injection by Saudi Arabia, albeit with extremely harsh conditions, marginally strengthened the rupee and that too for less than a week; and (ii) while the rupee will strengthen as it will provide a comfort level to multilaterals/bilaterals with lower rates on other debt instruments (sukuk/Eurobonds/swap arrangement and borrowing from the commercial banking sector abroad) yet its gains may not be as high as considered by optimistic government ministers as the economy would struggle to come to terms with higher administered input prices most of which are indexed to dollar/rupee parity (electricity tariffs are expected to rise as is the petroleum levy), and with the Sensitive Price Index over 11 percent in the week ending before the money bill was tabled in parliament, it is likely that the impact would be felt at the grass root level.

And finally, the crux of the issues facing the economy will remain, notably the rise in the current expenditure, mainly through higher mark-up than was budgeted, the 200 billion rupee reported slashing of the Public Sector Development Programme would bring the total requirement of 700 billion rupees as suggested by the IMF claimed by Chairman FBR to 543 billion rupees but the impact of this on productivity which in turn will impact on tax collections may not have been factored in and the socio-economic impact of these elements remains to be seen.

What has been unanimously opposed by the opposition, a few former central bank governors and economists, has been the State Bank of Pakistan (SBP) amendment bill which seeks to grant greater autonomy to the apex bank. There are those who accuse the incumbent governor of negotiating greater powers with less accountability with the IMF team while others argue that for a developed country there is a need to synchronize fiscal and monetary policies and that the government must be allowed to borrow a minimum amount, 500 billion rupees, from the SBP.

The assumption is that the central bank, if granted autonomy, will take decisions at odds with the needs of the economy as determined by the political government and would not be accountable to parliament or the general public.

However, one may well ask the detractors of the bill, whether any governor has been held accountable for taking decisions that have backfired horribly – examples include deliberate over-valuation of the rupee during the Dar tenure as finance minister, linking the discount rate to the consumer price index instead of core inflation from July 2019 till the onset of the pandemic in March 2020.

In an ideal world the apex bank and the political government would take decisions based on the state of the economy and one could draw an analogy from Adam Smith’s invisible hand whereby the bank and the federal government would complement each other’s policies without the need for consultations: contractionary policies in the event of high inflation and expansionary policies in time of a recession.

However, ideal situations do not prevail in our world but as pointed out by foreign minister Shah Mehmood Qureshi if the next government does not support these amendments then all it needs is a simple majority to undo this amendment.

Copyright Business Recorder, 2022


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