EDITORIAL: Federal Finance Minister Ishaq Dar announced that the prices of petroleum products would remain constant till the next scheduled review at the end of the current month to become effective on the first day of December.
This decision is a populist one and is a reversion, however partial, to the 28 February 2022 relief package announced by the Khan administration that accounted for an unbudgeted subsidy of 250 billion rupees as per the budget documents for the current year which were reversed in two stages - 28 May and 2 June this year – nearly seven weeks after the no-confidence motion was passed.
The focus of this decision, so notes PML-N (Pakistan Muslim League-Nawaz) stalwarts ad nauseum, was on setting the economy on the right path even though it was at a considerable cost to its politics. This rationale ignores the fact that without this reversal the International Monetary Fund (IMF) had refused to entertain any request for initiating the next mandatory review which was a prelude for the release of the next tranche as well as the release of pledges by not only other multilaterals/bilaterals but also friendly countries.
In addition, the budget for the current year envisages generating 750 billion rupees from petroleum levy, against the budgeted target last year of 650 billion rupees under this head that was revised downward to 135 billion rupees – a target already under considerable stress due to: (i) the reluctance of the government to collect petroleum levy as agreed with the IMF as the international POL prices in the first three months of the year were prohibitively high though the petroleum levy on petrol is at 50 rupees per litre today, the maximum allowed under the law, with room to raise the levy on HSD; and (ii) a significant decline in demand due to very high domestic inflation.
It is also relevant to note that failure to meet even one month’s revenue target would activate a contingency plan agreed by the Pakistani authorities with the IMF noted in the seventh/eighth review documents (uploaded on their website end September), that envisages imposing a general sales tax on POL products up to 17 percent (which at present is zero).
The October revenue target was missed though the government was at pains to highlight the fact that its provisional four-month cumulative revenue data showed collections of 1.840 trillion rupees against the target of 1.6 trillion rupees.
Petroleum levy (PL) is not itemised under FBR taxes but under other taxes mainly because the Centre is not required to share its collections with provinces that it has to in the case of divisible pool taxes.
However, the IMF is likely to look at total revenue collections of the government and no doubt the Fund will be extremely concerned with the shrinking fiscal space that is evident from flawed policy decisions taken subsequent to Ishaq Dar taking over as the country’s finance minister on 28 September – policies that include allowing the five export sectors to pay 19.99 rupee per unit of electricity at a time when the circular energy debt is close to 2.5 trillion rupees and with the general public paying up to 40 rupees per unit, the 1.8 trillion rupees agriculture package which is largely commercial loans but around 300 to 400 billion rupees additional government spending is envisaged, keeping the discount rate at 15 percent when core inflation is around 14.9 percent and consumer price index at above 25 percent and last but not least his decision to keep price of POL products constant at this time.
What is extremely disturbing are inappropriate assurances by senior economic officials appointed by the incumbent 11-party government, which include the statement by State Bank of Pakistan (SBP) Governor Jameel Ahmed that the country will not default on its debt payments with a little less than 8 billion dollars in reserves, an amount barely enough to meet 1.4 months of imports leave alone make over a billion dollar debt repayments due next month.
It is important to note that the shrinking fiscal space therefore is not only concerning with respect to revenue but also in terms of rising current expenditure with obvious repercussions on the budget deficit that, in turn, has negative implications on inflation.
What is apparent is that the Ministry of Planning has not uploaded its monthly disbursements for specific projects identified in the budget, an expenditure item that has the potential of fuelling growth raising fears that the current team of economic managers are following outdated flawed policies of the past notably slash development expenditure while raising current expenditure in general and subsidies in particular for entirely political reasons.
Copyright Business Recorder, 2022