Pakistan’s federal budget: Desperate circumstances, courageous measures
Pakistan’s economy had already been suffering before the COVID-19 outbreak, it was in no imminent danger of a recession. The Current Account Deficit dropped by nearly 73%; the “primary balance” was positive, at 0.3% of the GDP; the credit rating had improved from negative to stable; and the country’s rank on the “Ease of Doing Business” Index had improved from 136 to 108. Many analysts praised the government on taking measures to stabilize the economy. Because of stabilization efforts it was on the road to recovery, unfortunately the pandemic has dealt a significant blow. As with the rest of the world’s economies, the gains accumulated pre-Covid-19, were lost in Q4 as the pandemic spread.
A multi-pronged strategy with several immediate measures has ensured availability of basic goods and groceries, slow down the spread of the virus, provide immediate cash safety net support to the most deprived sections of society and other relief efforts. The State Bank of Pakistan (SBP) stepped in vigorously to provide support to financial institutions and borrowers with a relief package and gradual decline in policy rate. SBP initiatives are innovative, timely and financially courageous. As the financial year 2019-20 closes, the virus spread is gathering momentum and has still not peaked, the short-term future remains uncertain and global forecasts continue to be negative for at least in the next fiscal year.
Even seasoned experts are unable to predict the extent of shocks on the economy. The Economic Survey revealed that the GDP for FY 2020 was -0.38%, which was largely due to negative growth in the Services Sector that roughly contributes around 61% to the GDP. Q4 of the fiscal year 2019-20 is disrupted to such a greater extent that the numbers currently projected might also require revision as more actual data continues to emerge. On a month-on-month basis, exports fell 15.6% in March over February while imports contracted 21.2%. The month-on-month trade deficit shrank 27%. Petroleum products constituting around 30% of Pakistan’s total imports, the sharp fall in oil prices provided some relief to the Current Account Balance. However it is likely to be dampened by a fall in worker’s remittances from oil producing countries where thousands of Pakistanis may be at risk to lose their jobs.
Pakistan’s debt has increased by almost 40% since the new government assumed office, from PKR 29.9 trillion in FY18 to PKR 41.5 trillion in September 2019. According to IMF’s estimates, Pakistan’s external debt would reach US$ 113 billion by the end of FY20 and that the country would need over US$ 27 billion to finance its external requirements. In this precarious state, the COVID19 crisis has made it even more difficult for Pakistan’s public finances to service its mountain of debt. Pakistan could obtain G-20 debt relief, particularly for its external debt that has piled up at US$ 107 billion or 38% of the GDP. So far, Pakistan has managed to obtain a “Rapid Financing Initiative” loan worth US $1.4 billion from the IMF to meet its balance-of payments needs to tide over the pandemic. The World Bank and the ADB have also pledged around US$ 2.5 billion in assistance. Much of this comes from funds that had been allocated for projects already under execution but were either moving slowly or were stalled, and are now being diverted for COVID-19 assistance.
Even before COVID-19, economic activity slowly down meant the government was simply unable to collect its tax target. Post COVID19, the IMF has conceded collection will only be PKR 3.9 trillion in FY20, a shortfall of PKR 1.6 trillion. Moreover, the latest tax target of PKR 3.9 trillion means that in the last three fiscal years, i.e. FY18, FY19 and FY20, the revenue collected by Pakistan’s FBR has remained almost identical, even as expenditure has increased by PKR 2.6 trillion. For FY21, the IMF has projected a tax revenue of PKR 5.1 trillion, which is PKR 1.2 trillion more than what the FBR is expected to collect in FY20. However, this target seems unachievable in an economy expected to grow by only 2%, by IMF’s own calculation. Pakistan incurred 7.5% Fiscal Deficit as a percentage of GDP in FY 2020. Moreover, factoring in the PKR 1.2 trillion stimulus package to combat the COVID-19 crisis would push the fiscal deficit to double digits in FY20.
The total outlay of budget 2020-21 is Rs 7,294.9 billion, 11% lower than the budget estimates 2019-20. To meet the expenditures, the government has not made any satisfactory commitments to increase revenue. With a Rs. 1 trillion stimulus package proposed and no new taxes for the upcoming year, how will the revenue targets be net? Targeting is the reducing if govt expenditure and increasing its revenue, debt servicing and the defence budget comprise around 60% govt’s expenditure. In the last decade, Pakistan spent more than 2.5% of the GDP (3% in the last two years) on defence, slightly above the world average for the same period. Its spending on health as a percentage of the GDP was less than 1% for most of the same period, much below the international average of 9%.
The size of Public Sector Development Programme (PSDP) for 2020-21 is Rs 1,324 billion, with Rs 676 billion provinces. To provide relief to the people, there is no new tax in the 2020-21 budget. The sales tax rate for big retailers has been decreased from 14 to 12% and 130.55% higher allocation for Hospital Services, Rs. 208 billion is allocated for the Ehsaas Programme for the alleviation of poverty and helping the poor. Higher education has Rs. 34 billion, with Rs 180 billion for energy, food and other sectors. Rs. 30 billion for the Naya Pakistan Housing Scheme to build 10 million houses for the poor with Rs. 40 billion allocated for Pakistan Railways and Rs. 13 billion for federal government-run hospitals in Karachi and Lahore. Pakistan’s Defence budget for 2020-21 is frozen at Rs 1.289 trillion (almost 12% higher but in real terms the same as last year’s Rs 1.23 trillion). Pakistan economy projected to increase in size to Rs 45 trillion, from Rs 41.7 trillion (FY 20). Reduction in fiscal deficit to 7% GDP, from 9.1% in FY 20. Higher Revenue collection and a sharp cut back in non- development expenditures is targeted. Reduction in budget deficit will stabilize public debt at 87% of GDP, same as last year. FBR target Rs 4.9 trillion (from 3.9 trillion in FY20) with focus on reviving economic activity and ease of doing business.
Debt payments on loans taken is the single biggest cost item in budget and makes up 60% of FBR tax collection for the year. In its first 3 years PTI government has paid a record Rs 7.7 trillion on servicing of debt taken by previous governments. Subsidies are being reduced to Ps 209 billion, from Rs 349 billion (from FY20). Government intends to focus more on targeted subsidies. Running of Civil Government reduced 20% to Rs 4.4 trillion (from 5.5 trillion). Health related expenditures doubled to Rs 25 billion. Federal PSDP estimated at Rs 650 billion, an increase from Rs 564 billion in FY20. This will support revival of economy and job creation. PSDP funds directed towards high productivity sectors (e.g. Basha Dam etc.). Rs 35 billion subsidy for Naya Pakistan Housing will support construction spending of over Rs 300 bn. PM’s Ehsaas flagship program is to be scaled up in FY21 to Rs 230 billion (from budgeted Rs 190bn in FY20). Reduction of custom duty on 40 raw materials of various industries. Exemption of additional custom duties are now @ 0% customs duty in tariff. COVID-19 reduced production of cement, FED reduced on cement from Rs. 2 per kg to Rs. 1.75 per kg. The scope of seizure of non-duty paid goods is extended to all products subject to FED besides cigarettes and beverages. Real-time access to information and databases to the Board by various authorities such as NADRA, FIA, provincial excise & taxation departments etc. Tax Exemptions and Concessions for the Gwadar Port and the Gwadar Free Zone. Incorporation of Relief measures provided through SROs during the COVID pandemic
The underlying feature of this Budget in which a consultative process involved more than 100 institutions and individuals is the calculated risk Imran Khan’s financial team is taking in a no-win situation, there is no other choice but to depend upon increasing our revenues without recourse to taxation. Taxes, have been across the board to mitigate the efforts of the pandemic and to stimulate the economy. Our Finance Team has not hesitated not to increase salaries a lot of courage. To do this, that takes, the pandemic situation is tailor made to force people to use electronic means instead of the paper cash, the documentation of the economy will this be force-multiplied “digitally”. The documentation of the economy will increase the tax net and the volume of tax revenues to that being projected in the proposed Budget. That is why the AMA Scheme is a life-saver for Pakistan!
Those who oppose it do it out of vested interest, some to protect their corporate profits and some to protect their personal vested interest in the corporate entity they are shareholders of. In normal countries this would have been subject to accountability. Waiting 2 years patiently, I will go public with their names and business entity to hold these individuals accountable if they do not cease making the people of Pakistan hostage to their evil greed. Can you believe a handful denying millions and millions hope for economic emancipation? And just because they would not compete on merit? That not one single bank out of 15 having branchless banking permission from SBP refused to electronically integrate with them? In our corrupt system some among the regulators may have been unfortunately coerced and/or compromised, one particular individual who took over about 18 months ago is a severe disappointment.
During any crisis a lot depends on those who are handling this. We are fortunate to have technocrats like Dr Hafeez Shaikh and Naveed Kamran Baloch at the helm of the Federal Finance Ministry. To complement this is the excellent team led by Governor Dr Reza Baqir in the SBP. Since merit is a disqualifier in Pakistan, they have detractors galore, pure jealousy to go with lack of knowledge and expertise! Knowledge, experience and the courage is required to take sound, brave decisions for the good of the country in this situation. In the circumstances, they have served the country well above and beyond the call of duty. For steering a perilous course through desperate economic circumstance, plaudits aside more courage to them.
(This is the second and concluding article in the series)
Writer is a defence and security analyst