Policy differences

This is the second of a two-part series on little change in policy in spite of different socio-economic manifestoes representing different economic ideologies of political parties/military dictators.

Prime Minister Imran Khan blames his predecessors for the current state of the economy and conveniently ignores the fact that his own economic team has followed the policies of the past and in cases where out of the box thinking was applied, for example the inexplicable linkage of the discount rate to the consumer price index (CPI) as it includes items that are not responsive to the discount rate, instead of to the core inflation as previous practice, the result has been disastrous in terms of rising inflation and shrinking output and employment opportunities.

A more informed look backed by senior bureaucracy argues that two factors inhibit any incoming government from taking economic decisions distinct from the past.

First, the big budgetary guzzlers have not been contained and over time the percentage allocated for debt servicing/repayment as and when due (including periodic re-profiling of debt also undertaken last year), defense and civilian administration outlays have at best remained constant or at worst steadily increased as a percentage of total expenditure.

Debt servicing accounted for 45 percent of the total budget in 2018-19 (markup in revised estimates at 1987 billion rupees with foreign loan repayment of 928 billion rupees against total federal expenditure of 6452 billion rupees) and 47 percent in 2019-20 (2709 billion rupees markup in revised estimates, 1245 billion rupees foreign loan repayment against total federal expenditure of 8384 billion rupees). In 2017-18 total debt servicing and repayment of foreign loans amounted to 1868 billion rupees, total outlay was 4752 billion rupees accounting for nearly 40 percent of expenditure though this was largely due to deferred outcome of Ishaq Dar's flawed policy to access the debt equity market by issuing Eurbonds/sukuk at rates more than double the market rate and keeping the rupee artificially overvalued. In the current year, the budgeted amount for markup is 2946 billion rupees against the total outlay of 7136 billion rupees accounting for 41 percent but repayment of foreign loans is zero, a facility extended by the creditor nations due to the pandemic till the end of the year; besides these are budgetary projections at best and the public has learned to its cost that budgeted estimates are widely off the mark by the end of the year.

Civilian administration expenses rose from 398 billion rupees in 2016-17 to 460 billion rupees in 2018-19 and 445 billion rupees in 2019-20 (though claims that there has been a decline in this expenditure item did not indicate where savings had been implemented though perhaps it had been adjusted in the 115 billion rupees provision for contingencies). Defense expenditures rose from 841 billion rupees in 2016-17 to 1137 billion rupees in 2018-19 and 1227 billion rupees in 2019-20. Claims of no pay rise in civilian and military salaries in the current year, much appreciated by the public, nonetheless envisage a budgeted raise in running of civilian government by 30 billion rupees and defense employees related expenses by 20 billion rupees.

Pakistan as a perennial International Monetary Fund (IMF) borrower, currently the country is on the 23rd thirty-nine month programme, has adjusted some expenditure items as part of the Fund's standard conditions. Subsidies is a case in point must be targeted to the poor instead of across the broad, the multilaterals rightly argue, however, the approach of Pakistani administrations, including the incumbent administration's, has been to: (i) reduce the budgeted quantum of subsidies to meet the IMF conditions but because of the political cost raise it in the revised estimates at the end of the year. In 2019-20, the budgeted subsidies were 271.5 billion rupees while the revised estimates gave the total at 349.5 billion rupees - a rise of 29 percent. A similar picture is evident in 2018-19 - the budgeted amount was 174.7 billion rupees while the revised estimates were 254.9 billion rupees - a rise of nearly 46 percent; and (ii) instead of improving governance in the most heavily subsidized sector notably energy with Wapda/Pepco/KESC accounting for more than two thirds of all budgeted subsidies the policy has been to incur loans, compel the consumers to pay the interest through higher tariffs while the stock of circular debt keeps rising. The government is renegotiating the agreements with power companies which must be fully supported however it is unclear how much would be passed onto the consumers immediately and how much would be used to shrink the over 2 trillion rupees circular debt. Be that as it may, Prime Minister Imran Khan has set up a committee to undertake a study on subsidies and merge it with the cash disbursements under the Ehsaas programme which appears to be a good idea however one would hope that the government takes it to its logical conclusion.

Pensions have increased tremendously during the PTI government though at present an attempt is being made to rationalize pensions and seek employee contributions, again a step in the right direction; however, time will tell if this too reaches its rational conclusion. Military pensions rose from 177.7 billion rupees in 2016-17 to a whopping 354.9 billion rupees in 2019-20 - a rise of 50 percent in just four years while civilian pensions have risen from 67.4 billion rupees to 108 billion rupees in 2019-20 - a rise of 62 percent.

Second major lacuna in terms of the capacity of any administration to make changes is the tax structure which remains unfair, inequitable and anomalous. Reforms required in the tax structure were identified decades ago but which remain pending and the FBR tax to GDP ratio plummeted to 9.4 percent last fiscal year, and before one blames the pandemic for poor collections it is relevant to note that the target set and agreed by the economic team leaders of 5.5 trillion rupees was just too unrealistic. The shortfall by end December 2019, before the pandemic, projected by the government was around 4.6 trillion rupees, an amount also considered too ambitious by tax experts, and was projected to be scaled down further to round 4.3 trillion rupees by the end of the year.

Actual collection of 3.9 trillion rupees during 2019-20 implies a shortfall of around 400 billion rupees. The main contributors to the shortfall were: (ii) customs duty shortfall by around 450 billion rupees and this decline was due to severe contractionary monetary and fiscal policies of the government; and (ii) sales tax shortfall was around 680 billion rupees and while a large part would be due to the pandemic as the public deferred purchases yet a significant portion maybe attributed to erosion of each rupee earned (due to the eroding rupee dollar parity, a decline in output that raised prices and rising unemployment levels). However the government claims to have offset the shortfall (revised target as on December 2019) through 500 billion rupees additional State Bank of Pakistan profits than budgeted raising concerns about the credibility of this claim.

To conclude, the Khan administration needs to focus attention on reforming the tax structure while revisiting ever-rising reliance on borrowing from both the domestic market and abroad. The need to improve governance in utilities and autonomous entities is becoming more acute with each passing month and the expenditure containment in the Prime Minister's House is too small in percentage terms to make a difference even though it is good optics for the general public.

Copyright Business Recorder, 2020