Growth rate uncertainty

Finance Minister Ishaq Dar, flanked by the Special Assistant to the Prime Minister on Federal Board of Revenue (FBR) Haroon Akhtar Khan and Chairman FBR Nisar Khan held a press conference on his return from Dubai where the 10th tranche review under the International Monetary Fund's 6.64 billion dollar Extended Fund Facility was successfully completed. He stated that the government requested no waivers as all targets were met but he did express concern over the distinct possibility that the 5.5 percent budgeted growth target may not be met because of lower production of cotton in the country. He added "we are trying to take growth to over 5 percent" though one would assume that even the reduced target is going to be a challenge at best.
The growth rate is an extremely critical indicator as it has a direct impact on total tax collections, employment opportunities as well as on the rate of inflation. Given that Pakistan is on an IMF programme, the government has committed to a budget deficit target which, in the event of a lower expected growth rate, necessitates realisation of the budgeted revenue through the imposition of higher than budgeted taxes and/or a reduction in expenditure. It may be recalled that the government missed the revenue target during the first quarter of the current fiscal year and was thereby compelled to announce a mini-budget that included the imposition of a 5 to 10 percent regulatory duty on the import of 350 luxury and non-essential items, one percent additional customs duty across the board on all tariff slabs, an increase in Federal Excise Duty on cigarettes and a raise in fixed duty on import of old and used vehicles (above 1000cc) effective 1st December 2015. It was made patently evident during the ninth review talks that these measures were part of IMF's prior conditions - prior to the release of the 10th tranche. At the same time, the government, like its predecessors, has been unable to reduce the budgeted current expenditure and the axe has invariably fallen on development expenditure - a strategy that is anti-growth in itself. Unfortunately, however, Dar, like his predecessors, has been engaged in budgeting over-optimistic development and revenue targets that has implied a higher cost paid by the general public through mini-budgets.
The December mini-budget has ensured that the first half year revenue target has been met though it is unclear whether these measures would be sufficient to meet the budgeted revenue targets by the end of the current fiscal year. This is especially so given the admission by the Finance Minister that the growth rate would be less than budgeted by 0.5 percent. This admission would naturally send alarm bells ringing within the taxpaying public as, given that the country is still on an IMF programme, any reduction in budgeted revenue targets may imply higher levies in the remaining two quarters of the current year.
Another disturbing fact is the Finance Minister's contention that the growth target would be missed because of the failure of cotton farmers to meet their production targets. His capacity to externalise blame has implied his refusal to revisit flawed policies/strategies that are limiting growth in the economy. Economists, industrialists, exporters and other stakeholders are agreed that the major reasons for growth slowing down in Pakistan can be attributed to Dar's commitment to the Fund to contain the budget deficit target to a level that is having a negative impact on growth, refund delays by FBR, under his administrative control, to show a revenue base that is higher than is in fact the case, slashing development expenditure to try to meet the deficit target, heavy borrowing from the commercial sector thereby crowding out private sector borrowing, high utility tariffs (and continued heavy load-shedding) and taxes that are higher than the regional average leading to smuggling across porous borders and an overvalued rupee.
To conclude, it is extremely unfortunate that the Dar-led economic team is so resistant to recommendations by independent economists, industrialists and stakeholders and continues to rely on data manipulation to present a favourable picture; it is about time that the Prime Minister undertook an independent analysis of the state of the economy which, in turn, would require delinking the Federal Bureau of Statistics from the administrative control of the Finance Ministry.