New directions, arduous paths
Huzaima Bukhari & Abdul Rauf Shakoori
The budget is an important document through which the sitting government chalks out the financial direction of a country to generate revenue required for running the state. The current coalition government of the Pakistan Democratic Movement presented its first budget on June 10, 2022 at a time when the country is facing huge twin deficits and is desperately looking forward to foreign financial assistance with low expectations of relief.
The most immediate task at hand is of securing a financial lifeline from the International Monetary Fund (IMF) to avoid the risk of default. However, the economic team of Prime Minister Shehbaz Sharif has disregarded directions and commitments made by Pakistan to IMF under the Extended Fund Facility (EFF), which deviation has endangered the fate of EFF. In its staff-level report published in February 2022, IMF highlighted the consequences of delaying the process of reforms which would increase public debt and gross financing needs, lowering reserves. The report further accentuated that it would also jeopardize programme objectives and erodes repayment capacity and debt sustainability.
Despite having clear reform directions and mandates from the global lender, the government failed in execution, rather, negated these terms thus creating hurdles in meeting our fiscal needs. Pakistan agreed to initiate the process of reforms in personal income taxation and to harmonize general sales taxes including broader reforms in tax administration and public financial and debt management but in the current budget the government acted otherwise by offering relief in personal income tax to individuals falling in higher income brackets.
Similarly, the government also facilitated the stock market players which would cost the treasury about Rs. 8 billion. As a revenue measure, the government has introduced a capital value tax, where motor vehicles valued more than Rs 5 million will attract Capital Value Tax (CVT) @ 2%, and movable or immovable assets exceeding the value of Rs 100 million of a resident individual held outside Pakistan will be subject to CVT @ 1%. Pakistan is already considered as a tax haven for the rich and powerful elite class and in the past various amnesty schemes were introduced to facilitate privileged classes by enabling them to legalize their questionable wealth.
The previous government’s financial mismanagement impacted the overall growth of the country. However, while signing the IMF staff-level agreement on economic developments and policies under the EFF for the release of SDR 750 million (about USD$ 1 billion) it was projected by IMF that Pakistan’s GDP growth will be at 4% for the current year.
Based on the final results published by the National Accounts Committee, GDP growth is recorded as 5.97%. This remains a fact that higher GDP creates current account deficit forcing the government to take corrective measures to avoid financial crisis which results in an overall slowdown of the economy. Accordingly, the growth target for next year is estimated at 5% even in the current circumstances when commodity prices are going up globally. The incumbent government instead of implementing drastic changes in their fiscal spending focused on typical avenues to generate revenue that will badly influence growth and the government might fail to achieve the required number projected by the Finance Minister in his speech.
The Finance Minister also projected that inflation rate for financial year 2022-23 will be 11.5%. However, hype in commodity prices earlier due to covid-19 and now Russia-Ukraine war is increasing global commodity prices. Although he projected lower inflation compared to previous year but he did not share his plan for initiating fiscal reforms to control fiscal imbalances. The public that was already finding it difficult to make their ends meet is now witnessing a new tsunami of inflation. In a very short period, the price of petroleum products has increased by almost 40%. Rates of electricity have also been significantly increased and CPI is touching a new high of 13.8%. Due to these steps, it appears that the finance minister is more inclined toward raising fuel and electricity prices rather than implementing IMF policy reforms program.
Finance Minister also projected that the current account deficit for the financial year 2022-23 would be 2.2% without providing a clear road map for achieving this target which does not appear doable if a ban is imposed on imports that would impact growth and increase unemployment in the country. Being an import-based country, global commodity prices such as oil will directly impact our import bill as well. Besides, the government is planning to spend around 800 billion on development projects during the financial year 2022-2023. In presence of all these factors maintaining the current account deficit at 2.2% will definitely be quite a challenge.
Projected fiscal deficit for the upcoming year is around 4.9%. The government is expecting Rs. 7 trillion revenue collection through Federal Board of Revenue (FBR). Although this is not such a high target but the current policy rate and hike in utility prices are bound to impact profitability of Small and Medium Enterprises (SMEs) as well as the common man which will ultimately adversely affect tax collection. Additionally, the Finance Minister overlooked the effect of almost Rs. 1400 billion [US$ 7 billion] owed to China and global lender in the budget documents. The government is expecting to collect an amount of Rs. 750 billion through Petroleum Development Levy (PDL) in the coming financial year but this does seem exaggerated. The highest amount in terms of PDL was Rs. 425 billion collected in 2021 when crude oil prices were under US $ 60 per barrel. However, in the current circumstances, when oil prices are already high in the global market, PDL of 750 billion will add to the miseries of the common man. Further, estimates of provincial surplus of Rs. 800 billion seem over-ambitious and most probably this will also be bridged by leveraging funds from lenders.
With the current levels of fiscal and current account balances, we cannot continue this ad-hoc approach of borrowing funds to bridge gaps. Debts are ballooning with each passing day and currently, 41% of budgeted expenditures are represented by interest payments. Rather than taking concrete steps to formalize economy, the government has further created a gulf between corporate and non-corporate/informal business sectors. The current budget offers simplified and nominal tax for retailers through electricity bills as compared to a 29% tax on profit for retailers. Extending a fixed tax regime rather than profit-based taxation can promote informal sectors and cash-based dealings which will prevent documentation of the economy. Expected increase in domestic and foreign debt will further impact government estimates. Therefore, fiscal debt might surpass the figure of 6% of GDP.
Undoubtedly the coalition government inherited all these issues and cannot be blamed for the current position of the country. They are aware that the country is in the IMF programme and the previous government has violated the terms of agreement executed with it. They were also aware that there is a long list of fiscal reforms which inter alia requires following a strict policy for fiscal adjustment, adoption of strong revenue measures, including implementation of reforms in Personal Income Tax and General Sales Tax, enhancing efficiency in spending, improving public financial management by introducing new coordination mechanism, handling public debt and resorting to privatization. Reforms also require measures for poverty alleviation and social protection to achieve sustainable development to improve our fiscal conditions and reduce our dependence on global lenders. Mere criticizing the previous government for signing an agreement for raising fuel and electricity prices will not be helpful in the long run. Without implementing fiscal reforms, our sovereignty will remain compromised in the hands of IMF.
Huzaima Bukhari, lawyer and writer, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’.