EDITORIAL: The International Monetary Fund (IMF) has uncharacteristically uploaded the following sentence on its website for Pakistan on 22 June 2022: discussions between the IMF staff and the authorities on policies to strengthen macroeconomic stability in the coming year continue, and important progress has been made over the FY23 budget.
This lays to rest all claims that an agreement has been secured and the release of the memorandum of economic and financial policies (MEFP) is imminent, a document which stipulates each and every condition agreed between the Fund and the authorities (structural adjustments as well as quantitative time-bound) — be they upfront or subsequent to the tranche release.
A more realistic assumption, based on Pakistan’s previous 22 engagements with the Fund, is that while there has been agreement on the budget yet one cannot presuppose that the budget has been fully endorsed.
A critical question therefore is whether the budget would have to be partially or majorly rewritten to conform to Article IV consultations and sixth review documents uploaded on the Fund’s website on 2 February 2022 or contain adjustments, if any, negotiated by Pakistan’s incumbent economic team? This newspaper, supportive of a conservative approach, would argue that the 2 February 2022 Article IV consultation documents must be taken as a yardstick to determine the conditions that the country would have to implement if it is to receive the next tranche that, as repeatedly stated by the Finance Minister, is where all roads lead to.
The revenue collection envisaged in the budget receives the most attention not only by the general public but also by the standing committees/parliamentarians. In the budget 2022-23, the government envisages a net addition of 355 billion rupees in taxes, with claims that 267 billion rupees will be sourced to income, 60 billion rupees to sales tax and FED and 28 billion rupees to customs duties.
Concerns have already been voiced by domestic economists that around 75 billion rupees additional collections are unrealistic as they are likely to face legal challenges notably the 2 percent poverty alleviation tax on profitable companies/individuals (budgeted to generate 38 billion rupees), tax on deemed income at 5 percent of the value of non-productive immoveable property (expected to generate 30 billion rupees) and 8 billion rupees from capital value tax on foreign immoveable properties of Pakistani residents.
The Fund is reportedly also insisting that those earning between one to 2 lakh rupees per month, (regarded as key swing voters) constituting around 75 percent of all income tax payees, who are currently taxed only 100 rupees need to pay higher income tax. Retail sector too must not pay a fixed tax as per the budget but a tax commensurate to income.
A key problem on which discussions with the Fund may have only just begun relates to the macroeconomic framework that has been highlighted in the budget. Growth has been projected at 5 percent (the Fund projected 4.5 percent growth rate for next year though the macroeconomic indicators have worsened considerably after the PM’s relief package of 28 February which continued for the first six to seven weeks of the present government), inflation at 11.5 percent (again a gross underestimation), tax-to-GDP ratio of only 9 percent against 8.96 percent in the current year (with around 665 billion rupees additional tax collections sourced to the 5 percent growth rate), overall deficit at 4.9 percent against 7.1 percent last year (though Ismail mentioned 8.6 percent for the outgoing year on a private channel). And of course the projected primary surplus of 0.2 percent for next year (against negative 2.4 percent in the current year), which was projected at 1.2 percent in the Article IV consultation documents which could also be a major bone of contention.
While the power division has implemented the IMF supported reforms, quarterly adjustments and rebasing that will raise tariffs by 7.91 rupee per unit, the Fund has reportedly expressed concern over the dramatic slashing of power sector subsidies — from the budgeted 511 billion rupees in 2021-22 to the revised estimates of 989 billion rupees to only 490 billion rupees in 2022-23. In addition, the finalisation of energy cross subsidy reform, adoption by parliament of amendments to the Ogra act, and conducting and publishing of audit of Utility Stores on 2020 financial have not been met.
The 800 billion rupee budgeted provincial surplus that the Finance Minister claimed inexplicably on a private channel will have a shortfall of around 150 billion rupees (after Punjab has declared a surplus of 125 billion rupees with Balochistan and Sindh declaring deficit budgets and Khyber Pakhtunkhwa balance budgets for next year) and 750 billion rupees from petroleum levy, an indirect tax, that finance minister Miftah Ismail insists the government will be able to generate (an insistence that presupposes lower international prices, contrary to a global consensus, and a growth in domestic consumption in spite of a raise in prices).
Sadly, there has been little talk of curtailing expenditure, raised by a trillion rupees next year, at odds with the Fund’s exhortation to engage in “prudent spending restraint while fully protecting social spending.” And finally, the Monetary Policy Committee scheduled to meet on 7 July 2022 is expected to raise the discount rate to further curtail imports, to reduce the widening trade deficit, and inflation though the rupee will somewhat stabilise as and when the staff-level agreement with the Fund is announced on the Fund website. The hard times for the public are not over and as stated by Prime Minister Shehbaz Sharif politically challenging decisions would be required to bring the economy to a semblance of stabilisation.
Copyright Business Recorder, 2022