Budget and economic imperatives

The PML-N government has finally presented its sixth budget, one more than required during their tenure, on 27 April 2018. This has been the most awkward event in the country's parliamentary history. Opposition leaders as well as experts on the subject had advised the government not to take the trouble of making a budget that it would not be making use of. The recommendation was based on three fundamental premises: (a) the assessment of economic conditions needed to be addressed in the budget would not be in place; (b) there would be no void created in the absence of an approved budget as Article 86 of the Constitution gives full authority to federal government to make expenditures when the National Assembly is dissolved; and, (c) all budgetary measures (particularly relating to taxation) would create uncertainty regarding their eventual survival under the new Government elected by people.
There was, in fact, an incentive problem, if the government were to give the budget it can make a populist budget, secure applause, score political points and leave the consequences for the new government to face.
This distorted incentive has indeed guided reasoning in the making of Budget 2018-19: "It's quite enigmatic" says an exasperated headline in the Business Recorder; "In a farewell budget, government showers business with incentives", declared the headline in the Dawn; "A candy-coated budget by Miftah" chuckled Express Tribune. These headlines betray the feelings one has when attempting to discern the contents of the new budget.
On a more serious note, let us analyze the budget from the points of view of two major imperatives facing the economy.
First, the fiscal deficit, which has surged to nearly 6% of GDP in 2016-17 from about 4.3% in 2015-16. The government had targeted 4.1% deficit during the current fiscal year but has informed us that the revised target is 5.5%. Going by what happened last year, even if it is 6%, when final number is out after June, it would be miraculous. Curiously, the budget proposes a deficit of 4.9%. Clearly, targeting deficit at this level, signals that even the semblance of fiscal adjustment is absent. The number itself smacks of any effort to avoid the digit of 5 (the famous Bata pricing of Rs 4.95). That apart, is this is a realistic deficit target? Our answer is in the negative. Let's quickly point out the major holes that may give away the unrealism of the target. There is a provision of Rs 286 billion as surplus from provinces. Last year, there was a negative surplus of Rs 164 billion (0.7% of GDP) against a provision of Rs 300 billion. There is every reason that during this year, no province would leave a cash balance in the provincial accounts. Thus the assumption of such a surplus is untenable.
Then there is a provision of Rs 300 billion on account of petroleum levy, a phenomenal increase over the revised estimate of Rs 170 billion during the current year. How could such a large increase of nearly 76% in this tax would be materialized, given that the rates are fixed and presently charged at the highest rate. The government has proposed to amend the law of petroleum levy to enhance the fixed rates. However, the minister has claimed that it is only amending the law to make room for higher rates without actually increasing them.But curiously, the revenue estimates have already build in the increase of Rs 130 billion.
That takes the tally, along with provincial surpluses to Rs 316 billion.
Then, just add the soft target of GIDC at Rs 100 billion for next year, when the revised target is Rs 15 billion, where nothing would be collected as the entire tax has been mired into legal challenges.
Then we have the Dawn report that says the tax measures are short by more than Rs 100 billion compared to the loss of taxes to be incurred for giving concessions. So, we see a shortfall of more than Rs 400 billion in revenues compared to the estimates given in the budget. This is 1.3% off budget (one percent is equal to Rs Rs 385 billion). So we see the fiscal deficit is already at 6% without further scrutinizing the expenditure side. An admitted expenditure not built in the budget is the impact of pay and pension, which the minister reportedly mentioned at Rs 70 billion, dismissing it as insignificant for the budget. However, this would add another 0.2% to the deficit, taking it to 1.5% more than stated in the budgetary documents.
Second, the current account deficit is all set torise to more than 5% of GDP ($16 billion) at the close of this fiscal year. This is the primary challenge facing the economy, a reflection of rising excess demand without having the necessary resources to support it. But this is the mirror reflection of the fiscal deficit. We estimate the size of this excess demand by the size of the current account during the year, which is likely to exceed $16 billion, based on 9-month results. How would this demand be met? So far we have done so by drawing down precious reserves that we built by privatizing banks and petroleum companies, auctioning the spectrum licenses, CSF receipts and borrowing from the IMF, World Bank, ADB and capital market. Those reserves that peaked to $20 billion (SBP) in October 2016 have continuously fallen down to $10.5 billion. What is more, during this period, we have borrowed at least $13 billion and that too we have used up in supporting this excess demand. We see that even today we are losing reserves at the rate of $700-800 million per month. There are reports of some exceptional financing of $2.0 billion being provided by Chinese banks. The rate of losing the reserves would remain unsustainable even after this exceptional support.
The budget has not even recognized the above challenge. In para-8(p), the speech of the minister simply notes the loss of reserves but only mentions that government is taking steps to shore up the reserves. This is a curious statement. Declaration of such an intent when only few weeks are left in the tenure of the government not inspire confidence. Besides, the process of building reserves is painful and requires fiscal discipline. A deficit target above 4% is not sustainable for Pakistan. The manner in which we have slipped this target is ominous, and, as we have argued in our last article (25-4-2018), there is not escape from seeking support from the Fund. It is amazing to note that the Finance Minister, in his post-budget press conference, has assured the nation that there would not be any need to go to the Fund. He hasn't indicated how he would avert this possibility. The budget surely is not the harbinger of economic stability. More importantly, there is a possibility that the minister may not be around to fulfil his assurance.
(The writer is a former finance secretary) [email protected]