ISLAMABAD: Economy dampens due to political instability and budget lags to revive business confidence, according to PRIME Institute quarterly economic report, said a press release.

The report highlights that 4th quarter of FY 2022 remained marred with political instability in the country, which contributed to deterioration in the macroeconomic indicators. Pakistan is currently facing challenges at the multiple fronts that will continue to exert pressure on the reserves and local currency.

Federal budget FY 2023 remains the most important policy development in the 4th quarter of FY 2022. The government has promoted budget as contractionary in nature but total expenditures increased by 4.9 per cent to Rs9.57 trillion compared to the last fiscal year.

The share of debt servicing continues to increase in the government expenditures; was 34.4 per cent in FY 2022 and will be 41.2 per cent in FY 2023. The budget has maintained a significant allocation of funds for subsidies i.e. Rs 664 billion for FY 2023, without evaluating the output of previous subsidies.

On the revenue side, the government has set an ambitious target of Rs7.47 trillion as FBR revenues, though possible in normal circumstances but unrealistic in the current scenario. The share of direct taxes in total tax revenues is 40.6 per cent while the share of indirect taxes is 59.4 per cent.

The government has the target of collection of Rs855 billion as petroleum development levy, which will be difficult to achieve when international petroleum prices are high. The government has also budgeted collection of Rs96 billion from privatization. Every year government includes the privatization of loss-making enterprises but remains unable to carry them out. The total loss of SOEs in 2019 was Rs143 billion.

For FY 2023, the government has budgeted overall budget deficit of Rs3,797 billion (4.9 per cent of GDP). In FY 2022, the overall budget deficit was set to be Rs3,420 billion (6.1 per cent of GDP) but it turns out to be Rs4,739 billion (7.1 per cent of GDP).

The government has adopted progressive tax system by raising the tax rates. According to Arthur BLaffer, a renowned supply-side economist and tax expert, taxes act like disincentives. The higher the tax rates, the lower will be the revenue collection and the higher will be the tax evasion. The imposition of a Super Tax on the high-income earners, usually the entrepreneurs, will only discourage the expansion of businesses and will lead to stagnation of businesses.

The government has promulgated fixed taxes for retailers and service providers to generate revenues. The underlying reason behind this initiative is the acknowledgment of the fact that government remains unable to bring retailers into the sales tax net. The imposition of fixed tax for specific businesses is actually discriminatory in nature and will create incentives for those retailers to keep themselves out of the sales tax net.

The report highlights that inflation remains the biggest challenge for the government, which has endangered the survival of the lower-income groups. In the 4th quarter of FY 2022, the average YoY CPI inflation stood at 16 per cent.

The government, for the first time in history, crossed the Rs6 trillion revenue mark, which helped to curtail the fiscal imbalance. The revenue collection in the 4th quarter was Rs1.733 trillion as compared to Rs1,448 trillion in the 3rd quarter of FY 2022.

The higher government’s borrowing to finance the public expenditures resulted in the accumulation of debt. The public debt (central government debt) accumulated in the first two months of the last quarter of FY 2022 (April and May) was Rs1.6 trillion as compared to Rs1.4 trillion in the 3rd quarter.

The foreign investment in Pakistan improved in the last quarter of FY 2022 despite the global uncertainty prompted by the Russia-Ukraine war and the re-emergence of pandemic, and political instability at home. In April and May, the net FDI to Pakistan stood at $312 million as compared to $170 million in the 3rd quarter.

The total private sector borrowing increased by Rs176 billion in April and May as compared to an increase of Rs143 billion in the 3rd quarter of FY 2022. The total private sector financing stood at Rs7 trillion till May 2022.

The performance of the country on the external front remained weak as indicators deteriorated and endangered the sustainability of the country. The government was able to slow down the speed of deterioration in the balance of payment crisis in the last quarter of FY 2022 with the current account deficit of $2 billion in April and May as compared to the $4.1 billion in the 3rd quarter.

Overall business environment deteriorated in the 4th quarter of FY 2022 due to political instability as manifested by drop of 3,855 points in KSE-100 Index as compared to the gain of 42 points in the 3rd quarter.

The State Bank of Pakistan has increased the policy rate but the aggregate demand remains unabated and inflation persists. This indicates the limitation of using the interest rate as a tool to curb inflation. Therefore, the most effective counter-inflation strategy would be simultaneous reduction in government expenditures and money supply and a reduction in the tax rate which will prop up country’s productive capacity.

Copyright Business Recorder, 2022