Budget framework 2020-21

Prime Minister Imran Khan reportedly deferred a decision on the budget framework for 2020-21 presented by the Ministry of Finance because no consensus could be developed with other ministries. Credible reports indicate that the proposed target for the Federal Board of Revenue (FBR) for next fiscal year was set at 5.1 trillion rupees. This target is also projected in the document uploaded on the International Monetary Fund's (IMF's) website titled request for purchase under the rapid financing instrument dated April 2020; it is 31 percent higher than the 3.9 trillion rupee revised target for the current year and only 8.5 percent higher than the 4.7 trillion rupees that the Pakistani authorities informed the IMF was achievable in the current year during the second mandatory review of the 39-month Extended Fund Facility programme (now suspended due to coronavirus). The Fund staff reportedly insisted that the target for the current year should be 4.9 trillion rupees though the documents on RPI indicate a pre-Covid-19 agreement on 4.8 trillion rupees, revised downward from the original 5.5 trillion rupees and further downgraded to 5.2 trillion rupees during the first mandatory review.

The achievability of the 5.1 trillion rupee FBR target would depend on two factors. First, the prevailing situation with the pandemic next fiscal year starting 1 July and the time required before the economy can be jump started. The Fund document on RFI repeatedly highlights the "higher than usual uncertainty" associated with the pandemic and in that context, one would assume that this target may have to be tweaked. And, second, given clear indications that Pakistan would revert to the EFF once the Covid-19 threat has abated, would the government, in consultation with the IMF, continue to support contractionary fiscal and monetary policies with the objective of curtailing aggregate demand as was the case between 12 May 2019 when the staff-level agreement was reached till the onslaught of the pandemic in March this year or whether it will begin to promote pro-growth policies with an in-built mechanism to generate higher taxes? Dr Hafeez Sheikh, Advisor to the Prime Minister on Finance, publicly stated that the government would engage in pro-growth policies, however a tax target of 5.1 trillion rupees does not reflect an expansionary fiscal policy. The IMF has unambiguously stated in the RFI document that "given Pakistan's limited fiscal space and remaining vulnerabilities, enacted measures must be targeted and temporary, focusing on immediate health spending needs and protection of the most vulnerable, while preserving long-term sustainability. In this context, the authorities must decisively press ahead with the reforms included in the EFF as soon as the immediate crisis pressures subside."

Expenditure was given at 10.3 trillion rupees in the IMF's RFI staff report (identical to the proposal by the Ministry of Finance) with current expenditure at 9.1 trillion rupees (2 percent higher than the revised estimates for the current year which explains the need for belt tightening) and federal public sector development programme at 586 billion rupees against the revised estimates of 488 billion rupees in the current year (20 percent higher than the projected estimate for the current year).

Two disturbing factors need to be highlighted here: (i) the figure for federal PSDP given by the Fund is 488 billion rupees and does not tally with the one released by the Ministry of Planning of 533 billion rupees till 3 May 2020; and (ii) the IMF gives a total of 8.88 trillion rupees for current expenditure against 8.76 trillion rupees pre-Covid-19 total giving an additional allocation of only 116 billion rupees. This includes a decline in interest payments from pre-coronavirus estimate of 2,883 billion rupees to 2,706 billion rupees with a reduction in defence spending from 1.26 trillion rupees pre-coronavirus estimate to 1.197 trillion rupees giving a total saving of 62 billion rupees. The Covid-19 relief package is estimated at 1.2 trillion rupees and hence the additionality of the entire package in terms of government expenditure is in question.

The framework presented to the Prime Minister appears to be identical to the targets indicated in the IMF's RFI document which leads to the unsettling conclusion that Pakistan's economic team leaders have already negotiated and agreed to the conditions for next year - conditions that are even more unrealistic than the ones agreed last year especially with reference to the FBR target and that contractionary policies have been agreed to continue into the second year of the EFF which would sound the death knell to many industrial units, thereby fuelling unemployment.