EDITORIAL: The Chairman Federal Board of Revenue, Rashid Mahmood Langrial, defended the revenue shortfall during the meeting of the Standing Committee on Finance by citing four prevalent factors: the exchange rate stability, lower than expected inflation, slow recovery of large-scale manufacturing sector and less than projected growth rate.
While his rationale is correct from an economic theory perspective yet what this shortfall indicates is the failure of the country’s economic team leaders to accurately project key macroeconomic statistics, notably growth and inflation, a trend evident in previous administrations as well, though the jury is out whether this is deliberate, as it enables an administration to claim an improvement in tax collections and a reduction in expenditure, which it does not expect to achieve by the end of the year, or a measure of inability, read incompetence, to make accurate projections through building advanced econometric models.
Be that as it may, at times when the country is on an International Monetary Fund (IMF) programme, as at present, where the budget was reviewed by the Fund team as a prior condition the responsibility for failure to forecast more accurately can be shared with the Fund staff.
The IMF would no doubt defend itself on three counts that are highlighted in the documents dated 11 October 2024 on its website.
First; with respect to exchange rate stability the document notes that “the limited depth of the foreign exchange market remains a concern to the authorities as it could propagate and exacerbate one way movement in the exchange rate…efforts will continue to deepen the interbank foreign exchange market and allow greater price discovery where banks act freely in the FX market without restrictions.
Greater transparency on SBP’s interventions and reserve accumulation strategy will also be conducive to market development. Staff also recommended unwinding the January 2022 shortening of the period for repatriation of export proceeds (which is assumed as an outflow).“
Secondly, “important shortcomings remain in source data available for sectors accounting for around a third of GDP while there are issues with the granularity and reliability of Government Finance Statistics.”
And finally, the FBR has been unable to implement some of the tax measures that committed to the Fund including (i) generate 500 billion rupees from traders, as envisaged in the first quarter of last year; (ii) while legislation to tax the farm sector has been passed as agreed with the Fund by all the four provinces, yet what is concerning is that its implementation is now scheduled for next fiscal year instead of from January 2025.
It is unclear whether the provinces would be able to implement this measure; and (iii) federal and provincial governments continue to announce extending incentives to special economic zones (pledged to end) as well as in tariffs (gas and power).
Langrial, however, projected the growth rate would pick up by March this year and maintained that there would be no further shortfall.
His projection is no doubt based on Ramazan’s advent in March followed by Eid which would, as is the norm, raise consumption significantly, as well as raise remittance inflows, which would fuel GDP growth rate.
However, large-scale manufacturing (LSM) sector registered negative 1.25 July-November 2024 against negative 1.9 percent for the comparable period of the year before – a negativity that has been evident since the onset of Covid 19 in 2020.
LSM is unlikely to be turn into the positive realm in spite of the religious festivals. Besides the government has pledged to the Fund in the ongoing programme not to extend fiscal or monetary incentives to industry and this would act as a further deterrent to an uptick in output as projected.
Agriculture sector on which GDP growth may have been premised by Chairman FBR is currently facing challenges due to the pledge to the Fund to desist “from price setting and procurement operations that are unresponsive to changing consumer preferences, exacerbated price volatility and hoarding.”
Langrial advised the parliamentarians that if they wish to judge the efforts of the FBR to increase revenue it is reflected in the increase in tax-to-GDP ratio, maintaining that it had risen from 9.5 percent in the first quarter to 10.8 percent in the second quarter of this year. Perhaps he ought to have also noted that as the GDP growth did not rise by as much as was projected the tax-to-GDP ratio rose.
There is much resistance to tax reforms by the elite for shifting the current 75 to 80 percent reliance on indirect taxes whose incidence on the poor is greater than on the rich that the government has pledged to the Fund with the FBR struggling to implement them as and when faced with threats of a countrywide strike.
Langrial was right in referring to the need for behavioural changes before tax reforms can be successfully implemented.
We, however, have been proposing a 2 to 3 trillion rupee reduction in current expenditure (where the elite are the recipients) for two years or till such a time as the behavioural change is visible.
Instead, disturbingly, the government has budgeted a rise in this outlay by 21 percent this year, notwithstanding the very narrow fiscal space.
Copyright Business Recorder, 2025
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