EDITORIAL: The expectation during negotiations between the International Monetary Fund (IMF) and the government of Pakistan on the Stand-By Arrangement (SBA) that gains in the financial account would offset the rise in the current account deficit expected due to the withdrawal of exchange and import restrictions has not materialised.
The current account deficit July-August 2024 as per the State Bank of Pakistan was negative 935 million dollars against negative 2035 million dollars in the comparable period of the year before while the financial account registered negative 3432 million dollars against negative 399 million dollars in the comparable period of the year before.
The net incurrence of liabilities peaked at 3157 million dollars in July-August this year against negative 8 million dollars in the first two months of last fiscal year (no doubt due to cessation of all foreign inflows as a consequence of failure of the then Finance Minister, Ishaq Dar, to reach a staff-level agreement on the ninth review with the IMF) that include 1776 million dollars general government (inclusive of disbursements of 535 million dollars and 780 million dollars amortization) with other net liabilities rising to 2021 million dollars compared to negative 83 million dollars July-August last year.
The overall balance is noted at 2210 million dollars in July-August this year compared to negative 1365 million dollars in the first two months of last fiscal year.
In other words, the financial account is likely to be inadequate to meet the current account deficit in months to come in spite of the significant borrowings from abroad subsequent to the SBA approved by the Fund Board on 12 July 2023 and therefore there is a legitimate concern that the continued expected rise in current account deficit would compromise the government’s objective to offset it by the financial account.
The caretakers have incentivised remittance inflows through official channels, a component of the current account deficit, envisaging all charges incurred on telegraphic transfers of 100 dollars and above to be paid by the federal government, at a cost of 80 billion rupees to the treasury.
While one would hope that inflows from official channels that were disrupted after Ishaq Dar’s flawed policy to control the rupee-dollar parity, a major reason for failure to reach a staff-level agreement on the ninth review, would be restored, yet there are concerns that the crackdown on currency speculators may appreciate the rupee to an extent whereby the illegal hundi/hawala system may continue to be attractive to overseas Pakistanis.
There is also a concern that the government’s primary surplus target agreed with the IMF of 0.4 percent in the current year may remain unmet largely because there has been no attempt to implement structural changes in the country’s tax structure which comes under the administrative control of the Ministry of Finance in terms of making it more equitable and non-anomalous by reducing the existing high dependence on indirect taxes whose incidence on the poor is greater than on the rich. And equally importantly, to reduce current expenditure, which is not backed by productivity rise and hence is highly inflationary.
The budget for the current fiscal year can be assailed for 61.3 billion rupee disbursed to parliamentarians for development projects by the previous government for purely political reasons and approval of current expenditure that is a whopping 26 percent higher than the revised estimates of last fiscal year and over 52 percent higher than what was budgeted for last year (a rise that was inexplicably approved by the Fund).
What is even more disturbing is the fact that the caretakers are following the same strategy as previous elected governments: slashing development expenditure to create the fiscal space to continue to fund current expenditure. This must change.
Those employed by the government have witnessed a 30 to 35 percent raise in their salaries at the expense of the taxpayers, the majority of whom are employed in the private sector, where unemployment is rising and salaries have stagnated over the past few years due to a decline in productivity.
In this scenario to continue to tax the already taxed through sustained reliance on indirect taxes, and the petroleum levy is an indirect tax, may be laying a landmine that may erupt in serious socio-economic unrest.
The recent raise in the prices of petrol and products effective 16 September may be justified on the grounds that it was merely a pass-through yet the fact that the levy is at the rate of 60 rupee per litre is not lost on the public.
It is hoped that the caretakers exhibit some gumption and backbone to reform the tax structure and widen the net and at the same time slash current expenditure through negotiating with the stakeholders, particularly government employees - civilian and military alike.
Copyright Business Recorder, 2023