EDITORIAL: The budget exercise has begun on schedule and the ministry of finance has reportedly already requested all ministries/autonomous entities to submit their budget proposals for next fiscal year (2022-23), including allocation for projects under Public Sector Development Programme (PSDP); the Federal Board of Revenue (FBR) has also begun its exercise to generate a tax revenue total that would be finalized after consultations with the International Monetary Fund (IMF) and at the same time would, as in past years, be inundated with proposals from all private sector entities including chambers of commerce and several industry-wide associations.
This accounts for a tug of war prior to budget finalization in recent years, especially years when the country is on a Fund programme as at present, with the private sector urging lower taxes and lower utility prices to fuel growth and exports backed by the ministries of commerce and industries but the Fund urging full cost recovery that has implied passing the entire cost of major sectoral inefficiencies onto the consumers with severe political implications — conditions that the Fund is not willing to phase out as indicated by the sixth review upfront extremely harsh conditions whose cost is disturbingly to be borne by the general public.
It is in this specific context notably the failure to take account of the impact of the Fund programme on the general public and merely to state that “staff also encouraged regularly (i) applying the mechanism of periodic inflation updates of all Benazir Income Support Programme cash transfers” with virtually no fiscal space available to make this a financially viable possibility points to the fact that the Fund programme design is flawed and needs a revisit.
The Fund’s sixth review documents indicate a tax revenue projection of 6100 billion rupees for the current year (against the programme target of 5963 billion rupees) or, in other words, higher than what was originally envisaged in the programme. Collections under petroleum levy were downgraded from the budgeted 610 billion rupees to 356 billion rupees and non-tax revenue was budgeted at 1.38 trillion rupees. Three observations are in order. First, the government claims that the 28 February relief package (10 rupee per litre decline in price of petroleum and products and 5 rupee decline in per unit electricity price plus 2000 rupee additional every three months for BISP beneficiaries) was possible due to higher revenue than projected — a claim that does not reflect ground realities.
Second, the rise in FBR revenue is mainly attributable to higher imports that account for a widening of the trade deficit to a historical high of 32 billion dollars within the first eight months of the current year and is projected to be over 50 billion dollars by fiscal year end (30 June 2022) which necessitates mitigating measures, including a further rupee erosion and even greater reliance on external borrowing that rose from 95 billion dollars in 2018 to over 130 billion dollars today. An obvious mitigating measure is to curtail borrowing for budget support with the Khan administration acknowledging on the floor of the house that 10 billion dollars was borrowed from external sources for budget support.
And finally, while the Fund reduced the budgeted petroleum levy target from 610 billion rupees to 356 billion rupees and non-tax revenue from 1420 billion rupees to 1383 billion rupees yet as international events unfold the subsidy on petroleum and products may be far greater than the reduced target agreed and with the climate hardly conducive for privatisation as a means to generate the non-tax revenue there is the distinct possibility that the revenue shortfall may push up the budget deficit from the budgeted 6.9 percent of GDP to over 8 percent of GDP. This may be even higher if the Fund does not accept the higher GDP growth rate of 5.7 percent (instead of the 3.94 percent earlier calculated) due to rebasing exercise to 2015-16 prices.
Cynics may well argue that budget formulation for the past decade and more has been an exercise in futility as mini-budgets as well as relief packages due to a sitting government’s political compulsions (especially as elections approach) have become the norm. There is a need for a change in the mindset and the way to start is to slash current expenditure that has risen to a historic high since 2018 — from around 4.3 trillion rupees to over 7.5 trillion rupees today (and rising with the announced relief package). At the same time there is a need for the Fund to revisit its standard conditions that are adversely impacting on the wellbeing of the general public and desist from sanctimoniously urging debtor governments to achieve full cost recovery while absolving itself of any blame for the subsequent rise in inflation by urging a cash-strapped government to link disbursements to the poor to inflation.
Copyright Business Recorder, 2022