A finances amid financial deadlock – Opinion

The overarching objective of the budget is not pro-poor, an acute political compulsion today with 13.8 percent headline inflation for May, 9.7 percent core and Sensitive Price Index (SPI) registering a rise to 20.69 percent in the week ending 2 June 2022, but whether the International Monetary Fund’s seventh review frontloaded conditions have been met reportedly envisaging an extremely contractionary budget designed to not only bring the primary surplus (minus debt servicing) within the positive range but to reduce the budget deficit to a sustainable level in 2022-23.

While Finance Minister Miftah Ismail failed, as did his predecessor Shaukat Tarin, to convince the Fund to phase out the extremely harsh upfront conditions agreed by the two men who are currently out of a job — Dr Hafeez Sheikh and Dr Reza Baqir — yet the two are agreed that the success of the seventh review is critical to dealing with the prevailing economic impasse though that, sadly, has not stopped them from hurling daily barbs against each other.

Inflation is targeted at 11.5 percent for next fiscal year — a reduction of 0.2 percent from the 11.2 percent average for the outgoing year however with the May headline inflation at 13.8 percent and theSPI for last week at 20.69 percent this target appears too optimistic especially as severely contractionary monetary and fiscal policies are a prerequisite for the seventh review success.

The sixth review documents reveal that the agreed (programme) primary surplus was 0.4 percent for the current year (plus 25 billion rupees) though negative 2.4 percent of GDP was achieved (665 billion rupees) while 0.2 percent is budgeted for next year though the actual agreed in February 2022 with the Fund was 1.3 percent.

Budget deficit is projected at 7.1 percent this year with 4.9 percent projected for next year, a decline of 3.7 percent, with the total budgeted expenditure of 9502 billion rupees – a 12 percent rise compared to last year with revenue projected to rise by 16.67 percent (from 6 trillion rupees to 7 trillion rupees) and non-tax revenue to 2 trillion rupees against the budgeted 2080 billion rupees last year (though not realized).

What is required if the budgeted primary surplus and budget deficit are to be achieved? First and foremost, the success of the seventh IMF review which would trigger concessional external loans of 3.125 trillion rupees – 16 percent higher than the current year and keep the mark up payment on foreign debt to a reasonable 510.9 billion rupees next year.

Second and critically important for accounting purposes the rupee-dollar parity taken as 183 in the budget may be achieved soon.

Third, mark-up for next year on domestic debt is to rise by a whopping 29 percent which implies that the government’s reliance on domestic debt is going to rise, a highly inflationary policy that one would hope presupposes a positive discount rate (rather than a rate which is in the negative arena — a policy that was disastrously followed by Ishaq Dar during his tenure as finance minister).

And further bank borrowing is budgeted to rise from 681 billion rupees in the current year’s budget to 1.172 trillion rupees next year — a 61 percent rise, and non-bank borrowing from 1.241 trillion rupees in the current year’s budget to 1.996 trillion rupees in next year’s budget envisaging a rise of 72 percent.

Fourth, the reliance on indirect taxes whose incidence on the poor is greater than on the rich is to continue next fiscal year with sales tax collection budgeted to rise by 22.7 percent (and disturbingly the filers and non-filers distinction has resurfaced which would legitimize the non-filers) and petroleum levy budgeted at 750 billion rupees (which would easily absorb the 2000 rupee per household earning under 40,000 rupees per month as well as for the 8 million Benazir Income Support Programme beneficiaries). However, it would not be possible to impose this levy till the international prices of oil and products come down or unless Saudi Arabia extends cheap oil facility and/or deferred oil payment to Pakistan which has been budgeted though no formal announcement made yet.

The introduction of tax on deemed income would be levied from unutilized property above 25 million rupees including luxury farm houses however this may be challenged in a court of law as property comes under provincial governments.

Chairman Federal Board of Revenue in a post-budget briefing noted 316 billion rupees additional revenue from direct taxes, 34 billion rupees from customs and 90 billion rupees from sales tax and federal excise duty however this data is not in synch with the data in the budget documents however the discrepancy maybe attributed to the revenue rise due to the projected 5 percent growth.

Fifth, halve the subsidies from the revised 1514 .9 billion rupees in the current year to 699 billion rupees next year. While 250 billion rupees in the revised estimates in all probability refers to the subsidy on petroleum (28 February relief package referred to as a ‘landmine’ by Ismail) yet the government also envisages slashing other subsidies that may not be politically possible including a reduction of: (i) 499 billion rupees to Wapda/Pepco, (ii) 3 billion rupees to KE; (iii) 4 billion rupees to Utility Stores; and (iv) 10 billion rupees on fertilizer; while increasing subsidy on Metrobus by 2 billion rupees (a project associated with Prime Minister Shehbaz Sharif) and on import of urea by 6 billion rupees.

And finally, a historically high provincial surplus of 800 billion rupees, 40 percent higher than last year, which given the failure each year of the provinces to meet the federal budgeted targets should be a source of concern.

Federal Public Sector Development Programme (PSDP) has been allocated 727 billion rupees which one may assume will be slashed subsequent to the restart of negotiations on the seventh review with the Fund. In addition, the 5 percent projected GDP growth rate for next year may well be compromised as and when the PSDP is slashed and as and when the Fund seeks further tightening of the fiscal and monetary policy in weeks to come.

Defence would receive 1523 billion rupees in the current year against the budgeted 1370 billion rupees – a rise of 11 percent that barely matches head line inflation for next year. Running of civilian government is budgeted to receive 550 billion rupees against 479 billion last year making one wonder where the 40 percent decline in government officials and cabinet members fuel allocation and cessation of all but the most essential foreign visits has been adjusted.

Finally, it is relevant to note the risks highlighted in the budget that range from external (Russia-Ukraine war, tightening global financial conditions to reduce demand pressure) to domestic risks that include exchange rate depreciation that will have an immediate impact on debt in foreign currency, monetary tightening and fiscal consolidation measures may slow down economic growth (almost a certainty) and an acknowledgement that would no doubt fuel intense speculation “domestic political uncertainty may result in macroeconomic imbalances.”

Copyright Business Recorder, 2022