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Reading the budget

The writer heads the Sustainable Development Policy Institute.

The task of preparing Pakistan’s federal budget is quite a complicated one. On the needs side, it has four Ds: debt servicing, defence, day to day administration and development. On the resources side, it has two ingredients: federal revenues (generated both from tax collection and non-tax income) and borrowing (from domestic banks as well as bilateral and multilateral foreign lenders). Since the needs always outrun resources, the makers of Pakistan’s budget continuously struggle to match them.

What makes this complicated task even more complex is the fact that the strings attached to borrowing from the IMF are always directly linked to such budgetary indicators as tax collection, inflation, interest rate and currency’s value. When Pakistan is getting financial assistance from the IMF, as it is doing now, the making of the budget starts with the setting of a target for fiscal deficit – the gap between revenue and expenditure. Often, the revenue gets inflated and the expenditure is deflated in such a way that the imbalance between them does not exceed an IMF-mandated deficit target.

This year’s budget has an additional intricacy: Covid-19. The economic and financial impact of the coronavirus has been so widespread across Pakistan’s political economy that policymakers have termed the 2020-21 budget as one concerned more with “survival” than with growth. In my opinion, in the coming 12 months, we will have to deal with four Ls along with the four Ds mentioned above. These are: lives, livelihoods, lockdown and locust.

The government, too, is aware that it cannot overlook or undermine the importance of these factors. The officially released latest edition of the Pakistan Economic Survey contains a section titled ‘Covid-19 Advent and Impact Assessment’ which talks about the loss of jobs, loss in revenue, loss in exports, loss of economic growth and loss of precious lives.

Let us draw a brief outline for the future course of these losses. As of June 14, Covid-19 cases in Pakistan have approached 141,000. In the first 14 days of the current month, the daily average of detected corona cases has been a staggering 5000. This can rise further as the spread of the disease has not peaked yet. But even before the peak is reached, Pakistan’s health infrastructure is beginning to creak. The budget, therefore, needs to allocate enough resources to improve this infrastructure so that it can effectively handle the medical impact of the corona pandemic.

It is important to note here that the country’s health facilities were far less than adequate even before Covid-19 struck. For instance, only one hospital bed was available for more than 1,680 people. The budget needs to focus on improving this ratio. It also needs to ensure that child immunisation campaigns, which have been halted due to Covid-19, are resumed. The current level of immunisation, at 66 percent of all children in the country, is too low to be effective against such scourges as polio.

The economic shock of Covid-19 has been as bad as its medical effects. It is directly threatening the livelihoods of 27.3 million informal non-agricultural sector workers, and 22 million agricultural sector workers. A study by the Sustainable Development Policy Institute (SDPI) shows that one million small and medium enterprises (SMEs) may not survive if they are forced to remain closed for more than one month without any government assistance. In any case, the chances that the benefits of the government’s business relief package will reach them remain slim because most of the 3.25 million SMEs in the country are not documented and, thus, are ineligible to receive any Covid-related financial assistance. The budget needs to do something to mitigate the loss of such livelihood opportunities.

A corona-related lockdown on business activities has also caused an immediate dip in revenue generation. In the months of March and April each, the FBR collected 13.4 percent less taxes than it did in the previous months. This is where the balance between giving incentives to businesses to remain open and making them pay taxes becomes really difficult to maintain.

Another important task at the hands of budget-makers is to help 42 million students overcome the loss of time and classes they have suffered as a result of educational shut-down occasioned by Covid-19. This can be done by providing them high-speed internet access at preferential prices and making lectures and notes available to them through online and offline digital means. Some mechanisms on the lines of BISP must be devised to provide financial and technological assistance to these students on an urgent basis.

The list of Covid-induced economic and social losses can go on forever so I am restricting myself to mentioning only those which need immediate attention and which should be the essential ingredients of the government’s ‘survival’ budget.

Huge flocks of desert locusts have attacked 51 districts of Pakistan, hurting the country’s economy, agriculture in particular. According to some latest estimates, if controlled successfully, the locust attack will inflict an economic loss of Rs250 billion in 2020-21. If it cannot not be controlled, the loss may escalate to one trillion rupees. This means the next budget needs to allocate sufficient resources to respond to the locust attack so that these massive losses can be averted.

Pakistan is facing a situation where the needs sides of its budget-making exercise is expanding but the indigenous part of the resources side is shrinking.

This is where the external part of the resources side becomes extremely important. Since Pakistan is already receiving IMF’s financial assistance, no budget can be finalized without its input and approval. Due to a big drop in revenue collection in March and April, Pakistan tried – unsuccessfully – to convince the IMF that the tax collection target for 2020-21 be set at Rs4500 billion and fiscal deficit be allowed to remain the same – around 9 percent of GDP. The IMF, however, asked the revenue collectors to aim high. It has, however, given the signal that it could be flexible in its targets to accommodate fiscal slippages caused by non-policy factors such as Covid-19 and locusts but it has made it clear that the deficit will not be allowed to increase due to non-developmental spending.

Seen in this context, the tax revenue target for 2020-21 being set at Rs5,464 billion appears too high to be achievable. Given that the government could not achieve even its reduced tax collection target for 2019-20, it is highly likely to do the same this coming year.

This failure means the government will have to rely on more borrowing from both domestic and external sources. Some of the numbers carried in the budget documents for 2020-21 show how much borrowing the government will require in the coming fiscal year. For instance, even if the government meets its highly ambitious revenue target, it will be left with Rs3,700 billion after giving the provinces their share under the NFC award. Compare this with the spending the government has to make in any case over the next 12 months: Rs2946 billion for debt servicing, Rs1289 billion for defence, Rs480 billion for civil and military pensions and Rs476 billion for running the civil administration. So, even if the government does not spend a single penny on a public-sector development programme, it will still need to borrow at least Rs3000 billion in the next fiscal year.

But it is extremely important that the government expand, rather than contract, its development programme and other social protection facilities so as to help people, businesses and communities get over the negative impacts of Covid-19. To address these issues, the government has included a Rs1200 billion stimulus package that Prime Minister Imran Khan announced in April this year in the budgetary allocation. It has also increased the allocation for BISP – which has been renamed as Ehsaas – to Rs200 billion and has earmarked Rs70 billion specifically for the Covid response.

In my opinion, the government must make a considerably upward revision in the development expenditure. It should also allocate more money for fighting off both the coronavirus and the locust attack. It should similarly focus on ensuring food security, expansion of ICT so that students in remote areas can attend classes and take examinations remotely, and increasing monetary allocations for scientific research, particularly in agriculture so that crops, vegetables and fruits resistance to climate change and pestilence could be developed on an urgent basis.

All this, however, does not require a massive policy shift. Since we have been financing the four Ds through borrowing for decades, we only need some more borrowing to finance the four Ls. This will certainly have economic and financial implications but it will be an investment in the future – not a dead expenditure on building more office space and recruiting more officials. Done correctly, this investment can help us generate surplus in the future.

This article was originally published at: https://www.thenews.com.pk/print/673645-reading-the-budget

The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.