The worst case economic scenario has already been shared with the public: be ready for more hikes in electricity and gas rates as well as in the price of petroleum products; and in the event that the international price of fuel declines then be ready for the government to begin to rely on these low hanging fruits as a revenue source – a charge supported by the 750 billion rupees budgeted as petroleum levy for next fiscal year which, the public needs reminding, can, under existing legislation, be upped to as high as 30 rupees per litre.
The best case scenario however has not yet been openly shared though it is doing the rounds in the federal capital. Foreign inflows, at an advanced stage of negotiations, constitute roll-overs by friendly countries (China, Saudi Arabia and the United Arab Emirates) which, incidentally is also a key International Monetary Fund (IMF) condition under the ongoing 6 billion-dollar Extended Fund Facility.
Additional support from friendly countries, read loans at concessional terms as well as deferred payment on oil imports has been agreed - some contingent on the success of the IMF’s seventh review as per reports emanating from the capitals of the friendly countries (subsequent to Prime Minister Shehbaz Sharif’s visit to Saudi Arabia and a stopover in the UAE) and some maybe not subsequent to the Chief of Army Staff’s visit to China with a delegation comprising of all three armed services. Reports in the federal capital also suggest that the government is in negotiations with Qatar for deferment of gas imports payment.
The total amount of rollovers is estimated at around 8 billion dollars while additional support of the same amount has been finalized by the friendly countries at relatively easy monetary terms and conditions, relative to loans procured earlier. However, as none of the friendly countries that are being engaged by the civilian-military leadership are known to be supportive of publicly declaring the amount, timing or indeed the terms of their assistance hence the official silence that accounts for the sustained erosion in the rupee value and the dwindling foreign exchange reserves to 8.9 billion dollars.
Two observations on the state of the economy today are in order. First, in 2018 the current account deficit was 20 billion dollars, a historic high, however the prices of Pakistan’s major import item, petroleum and products, was much lower than at present.
The price of Brent crude was 71.34 dollars in 2018, dropped to 64.3 dollars in 2019, 41.96 dollars per barrel in 2020, and rose to 71.68 dollars in 2021. In February 2022 the price of Brent rose to 97.13 dollars per barrel which prompted Prime Minister Imran Khan to announce a 10-rupee per litre reduction with the reduced rate to be applicable till end June 2022 (an untargeted and unfunded subsidy). In March the Brent price per barrel rose to 117.25 dollars, declined in April to 104.55 dollars, rose again in May to 113.34 dollars and in June has risen to a 126.7 dollars per barrel.
So what are the options for the government today – options that would have to be faced by any administration, be it civilian, military, Imran Khan’s, or Shehbaz Sharif’s. There is no fiscal space to extend any subsidies, targeted or otherwise, with the projected budget deficit for the outgoing year at an unsustainable negative 7.1 percent. In addition, the budgeted expenditure and domestic resources for next year necessitate, as per finance minister Miftah Ismail, borrowing of between 36 to 37 billion dollars next year – a target that entails the success of the seventh IMF review as it would enable the government to borrow from other multilaterals/bilaterals and equity debt market at reduced (affordable) interest rates.
The austerity measures much touted by the eleven-party coalition government are at par with reducing current expenditure by the Khan administration (sale of water buffaloes/old cars and no tea/biscuits on offer by ministries to guests) given that during the Khan’s tenure current expenditure nonetheless rose from 4.3 trillion rupees in 2017-18 to 7.5 trillion rupees in 2021-22 while next fiscal year it has been further raised to a whopping 8.6 trillion rupees.
Second, the need to protect the poor and vulnerable from the global rise in oil prices with a consequent impact on the general price level has been acknowledged by most governments. Britain’s Conservative government has imposed a 25 percent windfall tax on profits of oil and gas firms – profits that Chancellor Rishi Sunak said are not because of changes to risk taking, innovation or efficiency – money that would help support the 19 billion dollars’ assistance envisaged to low income households with at least 1500 dollars support to almost 8 million Britain’s most vulnerable households.
Pakistan’s oil and gas companies, largely state owned, are facing a circular debt of over 2.6 trillion rupees and are in no position to be taxed. And instead the budget for next year envisages a fixed tax for retailers as final tax liability on income and sales tax, fully supported by the retailers but which then puts the onus on those who already pay income tax, while the tax on deemed income, poverty alleviation tax on income above 300 million rupees and capital value tax on foreign property owned by resident Pakistanis (projected to net around 75 billion rupees) are expected to be successfully challenged in the courts as in the past. The government has raised tax on banks — from 39 percent to 45 percent — however this raise may have cost implications on government and private sector borrowing.
The budget for next year however has raised Benazir Income Support Programme (BISP) allocation from 260 billion rupees in the outgoing year to 360 billion rupees next year – a 39 percent raise and envisages extending subsidies for wheat, sugar and cooking oil. So the question as to where the money is to come from can be simply answered: the government envisages over 3.2 trillion rupees in domestic borrowing (an amount at par with the annual borrowing of the previous administration — an inflationary policy) and borrow a whopping 36 to 37 billion dollars from external sources, already stated by Miftah Ismail, with only around 16 billion dollars expected from friendly countries on easy terms while the rest would be borrowed at high rates of return from commercial banks abroad, issuance of sukuk/Eurobonds etc.
The US Central Bank raised its interest rate from 1.5 to 1.75 percent, the biggest rate rise in 30 years to fight soaring prices, a decision that would fuel its imports. The question is whether Pakistani exports would benefit from the US rate rise? Pakistanis are currently struggling to cope with: (i) a 13.75 percent discount rate, expected to be further raised in the next Monetary Policy Committee meeting scheduled by for 7 July, that in turn would further raise the cost of capital to a prohibitive level dampening all economic activity with a rise in unemployment.
The rate is, on average, double that of our regional competitors’ and is designed to contain imports to reduce the burgeoning trade deficit; and (ii) the fast eroding rupee (due to dwindling foreign exchange reserves, at present no more than 1.5 months of imports) and the continuous rise in domestic inputs including electricity and transport costs. However, the projected assistance inflows, if and when realized would strengthen the rupee, as happened subsequent to the 11 to 12 billion dollars’ aid inflows from friendly countries in 2018, and with it imports including petroleum and products would become cheaper in rupee terms.
To conclude, the budget as presented in parliament on 10 June is unlikely to retain even a vague semblance of its original form and one would hope that current expenditure is slashed rather than, as has been the usual practice in the past, slashing development expenditure (which in any case appears to be overstated by 250 to 300 billion rupees), and the politically motivated revenue measures that are unlikely to be implemented with court stay orders and/or IMF opposition are abandoned in favour of structural changes that would render the tax structure fair and equitable (including needed structural changes to the appallingly run energy sector).
Copyright Business Recorder, 2022
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