EDITORIAL: Addressing a business conference three days before his scheduled budget speech in parliament, Finance Minister Miftah Ismail stated that the government would unveil a progressive fiscal consolidative budget designed to reduce the deficit to 5 percent.
Such an overwhelmingly positive evaluation of a budget yet to be tabled before the parliament has been the norm in this country wherein finance minister after finance minister claimed that all major issues would be dealt with and resolved through allocations and revenue envisaged in the budget.
Sadly, history shows that no government, civilian or military, had the gumption to implement structural reforms especially those that were politically challenging particularly in the power sector (with the circular debt now close to over 2.5 trillion rupees), the tax sector (with continued heavy reliance on indirect taxes, estimated at over 70 percent, whose incidence on the poor is greater than on the rich) and privatisation of poorly performing state-owned entities (SOEs) that were abandoned due to sustained worker unions’ opposition.
What is particularly concerning to independent economists today is the fact that key macroeconomic indicators have never performed as poorly as when the Shehbaz Sharif-led government took oath in the third week of April: reserves are at a low of 9.7 billion dollars (with the capacity to buy less than in 2018 when our major import item, petroleum and products, was half the price), the trade deficit is at negative 43.3 billion dollars July-May (against 33.8 billion dollars in the comparable period of 2017-18), the current account deficit has risen to 13.8 billion dollars (July-April) expected to end up at around 16 billion dollars by the end of fiscal year on 30 June 2022 against 20 billion dollars in 2017-18, a 57.1 percent decline in total foreign investment, and a rise in external debt from 95 billion dollars in 2018 to 140 billion dollars and a rise in domestic debt from 16.5 trillion rupees to over 27 trillion rupees by the end of the Khan administration.
The silver lining remained remittance inflows for the third consecutive year, at 26.1 billion dollars July-April 2022 though time will tell if this amount is sustained subsequent to the end of the Russia-Ukraine war and the end of lockdowns associated with Covid-19.
To-date the level of confidence in the capacity of the incumbent government to initiate a turnaround in the economy is tempered for two reasons: (i) the finance minister himself stated in a televised interview that at the time the government came to power less than two months ago, bonds were trading at 70 cents to the dollar and at present are trading at 65 cents to the dollar making reliance on issuance of eurobonds/sukuks or borrowing from commercial banks abroad economically unfeasible prompting him to state “all roads lead to the IMF”; and (ii) the seventh review of the International Monetary Fund has yet to be declared a success though finance minister Ismail, like his predecessor, has claimed that it is imminent.
Reports indicate that the Fund is expressing concern over government’s hesitation to implement the personal income tax recommendations (and instead to further tax profitable entities including the banking sector and steel sector), capital value tax on certain transactions and taxes on petroleum and products (though at present the government has agreed to withdraw subsidies but has to yet agree on petroleum levy and sales tax).
On the expenditure side while the government has slashed fuel allowance given to government servants, banned purchase of cars, overseas tours and furniture and machinery for government offices, optics that must be appreciated as much as the previous Prime Minister Imran Khan’s sale of water buffaloes/cars and cheapest foreign travel, yet these are small items compared to the overall current expenditure allocations.
Unless the government can significantly reduce the size of the federal government by doing away with ministries/divisions on subjects that stand devolved to the provinces under the 18th Constitutional Amendment and allocations for debt servicing, defence, pensions and civilian administration, it would be unable to make much of a difference in comparison to the Pakistan Tehreek-e-Insaf (PTI) government’s years.
Ismail also stated that during the last four years, 20 million people have gone below the poverty line; however, unfairly he did not dwell on the fallout of the pandemic, or highlight the exemplary work done by Dr Sania Nishtar under the Ehsaas programme (with Benazir Income Support Programme receiving almost 95 percent of all allocations). To acknowledge good work done by one’s predecessor and take full ownership of it is one of the key political lessons that Pakistani politicians have yet to learn.
The contractionary policies — monetary (already in place) and fiscal (to be announced in the budget) — are expected in the budget because they are the upfront harsh conditions without whose implementation the seventh IMF review will remain stalled. Structural time-bound reforms, particularly in the energy and tax sectors, are also expected in the budget though unless they are phased out, the rate of inflation in the country would rise manifold. It is our hope that the budget would have some out of the box solutions, including a focus on reducing current expenditure rather than entirely on raising revenue.
Copyright Business Recorder, 2022