The only way forward

EDITORIAL: Credible media reports, local as well as international, indicate that there is a massive disconnect between the primary surplus as calculated by the International Monetary Fund (IMF) team and that claimed by the Pakistani team — 0.9 percent of Gross Domestic Product, predicting an 850 billion rupees shortfall against 0.45 percent projecting a 450 billion rupees shortfall.

While either figure entails a massive revisit of the budgeted revenue and expenditure for the rest of the five months of the fiscal year, yet given the leverage of the IMF during the entire duration of the ongoing Extended Fund Facility programme, with assistance from multilaterals and bilaterals, including friendly countries, linked to staying the course of reforms as stipulated by the Fund, it stands to reason that the higher primary deficit would be used to spearhead revenue and expenditure policy decisions.

It is within this context that the Federal Board of Revenue (FBR) prepared and submitted to the Finance Division a 300 billion rupees mini-budget, that relied on the low-hanging fruit, defined as easy to collect, envisaging a heavier than ever reliance on indirect taxes — particularly sales tax (with the suggestion to raise the standard 17 percent rate by one percent) including the levy of withholding tax in the sales tax mode as direct taxes based on the ability to pay principle require taking politically challenging decisions that no administration, including the incumbent, have shown any inclination to implement.

That leaves a 100 billion rupee shortfall that the Fund reportedly wants the government to generate from petroleum levy or, in other words, raise the budgeted 750 billion rupee collection to 855 billion rupees. However, data shared with the Fund indicates that if the petroleum levy is maxed to 50 rupees per litre on all petroleum products for the remaining five months of the current fiscal year a maximum of 350 billion rupees will be generated by the end of the year unless the legislated levy is raised to 70 rupees per litre.

The cost for all postponements/delays in raising the levy on petroleum products attributed to the largesse of the cabinet in general and the finance minister in particular shall have to be borne by the people, which simply means the budget-making exercise of households for at least the rest of the year would push many a low income family under the poverty line.

And yet these revenue measures alone are unlikely to attain the primary surplus containment target and contingency measures agreed in the seventh/eighth review may have to come into force — measures that include imposing a sales tax on petroleum products (projected to generate around 100 billion rupees), withdrawal of tax exemptions (and certainly withdrawal of the 110 billion rupee electricity subsidy to exporters), and raising tax on cigarettes.

The question is whether the Fund is simply focused on raising revenue in the programme? Based on the current state of the Pakistan economy, envisaging external borrowing of over 35 billion dollars in the current year — 22 billion dollars for debt servicing and payment of interest and principal as and when due, and the rest for balance of payment support and to shore up reserves — and the insistence of Fund in its ongoing Egyptian and Sri Lankan programme loans to cut down expenditure, including defence, suggests that a cut in expenditure would also come under the microscope.

The two expenditure items that the Fund is unlikely to insist on slashing are Public Sector Development Programme (PSDP), already slashed as per past practice by the government — from the budgeted 727 billion rupees to 151 billion rupees (July-December) as indicated on the website of the Planning Ministry — and Benazir Income Support Programme (BISP) budgeted at 350 billion rupees. The Fund has emphasized on targeting subsidies and is rightly insisting that any electricity or food subsidy must be allocated through BISP.

While a cut in PSDP (Public Sector Development Programme) has implications on growth and therefore on tax collections yet the government must agree to slash current expenditure under the following heads: (i) a cut on defence that does not compromise the ongoing anti-terror efforts; (ii) slashing untargeted subsidies; (iii) stopping all civilian procurement; (iv) shutting down all 17 of the federal divisions/agencies on subjects that were devolved in 2010 under the Eighteenth Amendment; and (v) abandoning the pervasive policy of nepotism in appointments in state- owned entities.

These measures, if implemented during the remaining five months of the current year would go some way in reducing the burden on the common man envisaged in the mini-budget. One would hope that the economic team leaders realise that the only way forward is through far-reaching reforms as the general public can no longer bear the burden of their capitulation to political considerations or to their lack of ability to find ‘out of the box’ solutions.

Copyright Business Recorder, 2023