Roadmap for revival
The supplementary finance bill (commonly termed as the mini-budget) presented by Asad Umar received a mixed response. Many were expecting an overnight overhaul in Pakistan’s economy by the PTI government and were, therefore, not excited about the fact that the mini-budget didn’t contain any major “out-of-the-box” solution to fix Pakistan’s economy.
Before talking about the way forward for Pakistan’s economy, let’s discuss why it wasn’t easy for the finance minister to present any major out-of-the-box solutions in his mini-budget. In my commentary on the PML-N’s last federal budget, carried by The News on Sunday on May 6, 2018, I had concluded: “On the whole, my verdict is that the federal budget provides out-of-the-box solutions for undocumented economy, but presents an unrealistic target for fiscal deficit”. I was referring to some of the measures taken by Shahid Khaqan Abbasi’s government to promote a culture of tax-filing (including amnesty schemes) and the fact that in the last budget revenue targets were overestimated while expenditures were underestimated.
In its last federal budget, the PML-N had announced unprecedented relief for taxpayers, which was a good move provided there were some alternative revenue measures to sustain that relief. The revenue was overestimated to the tune of between Rs400 billion and Rs515 billion. Overestimated revenue included Rs100 billion for the gas infrastructure development cess (which has been challenged in court by the provinces; only Rs15 million were collected in 2017-18 against a target of Rs110 billion); Rs 130 billion collected by raising the upper slab for the petroleum levy (the upper slab was notional and was never applied by the PML-N or the caretaker government due to its potential political backlash); and Rs285 billion as the provincial surplus (historically, provinces have presented a deficit budget).
On the expenditure side, the last budget had no provision of expenses like the energy circular debt –the cumulative circular debt has exceeded the total allocation for this year’s defence budget – for public-sector loss-making enterprises, and for addressing rural poverty, which according to the latest Economic Survey of Pakistan is 2.5 times greater than urban poverty. While the throw-forward – the finances needed to complete 1,100 or more outstanding projects under the Public Sector Development Programme (PSDP) – stands around Rs 4 trillion, the PSDP had a meagre allocation for sustainable development goals. It was in this context that Asad Umar had to come up with some quick-fix corrective measures to bring the budget estimates closer to reality. Reverting tax rates to (nearly) what they were before the May 2018 budget, for those earning more than Rs2.4 million per annum; slashing the PSDP by Rs75 billion; imposing some regulatory and custom duties to discourage imports; and increasing the federal excise duty (FED) on 1,800CC and above cars would still not be enough to bring down fiscal deficit for Budget 2018-19 from 7.1 percent to 5.1 percent.
Two percent of GDP amounts to Rs 770 billion and the proposed corrective measures in the mini-budget fall short of this figure. Nevertheless, these measures are welcome decisions in the right direction. They will provide the government with some breathing space without the loss of much political capital.
An out-of-the-box initiative of the Abbasi-led government for the documentation of the economy was to bar non-filers from buying property above Rs5 million. The mini-budget has allowed non-filers to buy property. The flip-side of this decision is that it would discourage filers even though it would increase the circulation of money in economic activities. But most of these are ad-hoc measures and people are looking forward to the PTI’s recipe to overhaul the economy.
Well, we must keep in mind that the economy neither deteriorates overnight nor can it be fixed overnight. Apart from the budgetary misalignment of revenue and expenditures (fiscal deficit), Pakistan’s economy is also facing a huge current account deficit (high imports compared to exports, putting pressure on our balance of payment, foreign exchange reserves, and the value of rupee against the dollar).
The third salient feature of Pakistan’s economy is the federal government’s inability to spare funds for social-sector development (PSDP). Our net federal revenue is barely enough to meet non-discretionary expenditures of debt mark-up, its retirement, and defence expenditures. Successive governments had to borrow to meet yet another non-discretionary expenditure, ie running the civil government and the only discretionary expenditure PSDP. This borrowing not only results in increased gross external financing requirements, but also in a situation where the PSDP gets neglected and becomes the last priority of every decision-maker. Consistent neglect of social-sector development has resulted in reduced human development.
These issues are chronic in nature and one should not expect them to be resolved in one month or even during the government’s first 100 days in power. After getting breathing space through mini-budget, the government must work on stabilising the macroeconomy through borrowing/assistance from friendly countries and/or an IMF programme. An IMF programme, besides providing a letter of comfort for other multilateral donors, will also help carry out the much-talked-about institutional reforms, especially in the taxation and energy sectors. Taxation-sector reforms would help broaden the tax net whereas energy-sector reforms would plug transmission and distribution losses. These reforms need to be accompanied by the PTI’s resolve to bring back the “illegally acquired” wealth stashed abroad.
The cumulative effect of these measures would provide some cushion to the government for spending on PM Khan’s agenda of social-sector development that he hinted in his maiden speech after taking oath as prime minister. The reduction of income, and educational and health inequalities in an inclusive Pakistan, as per the vision of PM Khan, would require a well-thought-out roadmap and the implementation of that roadmap without the fear of losing political capital.
The next nine months will be important to refine this roadmap. Right now, Asad Umar’s job is to create a fiscal cushion for the innovative plan that he must reveal in his federal budget for 2019-2020. The people of Pakistan will be disappointed if they don’t find a cure for their economic woes during the PTI government’s tenure. However, they should be mindful of the fact that healing would start after the gangrene has been removed. The removal of the gangrene will not be pain-free. Are the government and the people ready to bear some pain?
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.