Revision of unrealistic targets

The Finance Ministry acknowledged that the mid-year (July-December) fiscal operations indicate that Federal Board of Revenue's (FBR's) collections, a major component of the government's total annual revenue, suffered due to unprecedented compression of imports, lower consumption of petroleum and products, decline in auto and auto parts sector, lower growth in the airline sector and overall economic slowdown. Thus, it concluded, the very challenging and unprecedented revenue target could not be achieved. This entire range of acknowledgements must be appreciated and reflects what Business Recorder has been consistently stating notably that the (i) FBR targets agreed with the Fund were completely unrealistic; (ii) the import compression given the tight monetary policy was to be expected though unprecedented; (iii) the auto sector (and other large-scale manufacturing sectors) suffered from a tight monetary policy and a very significant rupee depreciation; (iv) petroleum consumption declined due to jacking up of its price partly due to the rise in the international price of oil and partly due to raising the tax on it; and (v) finally the growth rate as projected by the Fund based on the agreed tight monetary and fiscal policies was a very low 2.4 percent, though the ministers maintained it would be above 3 percent and this in spite of the 2.4 percent noted in the budget documents.

The revenue shortfall has assumed significant proportions and the ongoing debate that remains unresolved between the IMF and the government is on how much to adjust the target downward. The Fund programme gave the target of 5.5 trillion rupees for the ongoing year which was revised downward to 5.23 trillion rupees during the first quarterly review. The downward revision in the first review documents indicates that the Fund targets are indicative and may be adjusted as the programme proceeds given changing internal and external factors; however, the government's intent to follow the path towards agreed reforms must be unwavering.

The government reportedly is seeking a 4.7 trillion rupee FBR target for the entire year while the IMF is reportedly insisting on 4.9 trillion rupee downward revision. As and when an agreement is reached on the revenue target there is a general consensus that the target for next fiscal year would be even more challenging. And what must be a source of serious concern to Pakistan's productive sectors is that unless the government makes some major adjustments in monetary and fiscal policies (including with reference to sustaining the heavy reliance on indirect taxes and on withholding taxes in the sales tax mode) growth is unlikely to enable the FBR to raise revenue collections to as much as is required by the Fund.

There are reports that the government would be required to raise at least 900 billion rupees in additional tax collections next fiscal, a doable although one would hope that the focus would be on raising direct tax collections which are less inflationary; and acknowledging a basic economic principle: sales of even what is regarded as necessities, for example, petroleum and products as well as utilities, would decline if their prices are raised to a point which is no longer affordable with the objective of raising tax collections.

Prime Minister Imran Khan has repeatedly stated that stabilisation has been achieved and that the government is now focused on growth. There is no evidence in terms of policy revision that substantiates this claim. Tight monetary and fiscal policies continue and the concern of the productive sectors with respect to taxes, discount rate and utility rates remain potent factors in their investment decisions. Additionally, even if the government succeeds in convincing the Fund to downgrade its revenue target for the current fiscal to the level proposed by the government and defers all other tax and utility rate rises till next fiscal year the projected 3 percent growth rate next fiscal would also become a challenge which in turn would continue to compromise the revenue targets.

Therefore, a reality check is necessary and discussions with the Fund must focus on how much tweaking Pakistan is to be allowed with respect to its fiscal policies in particular. The Fund must surely be aware that its programme is placing insurmountable pressure on the public and the productive sectors and that for its successful completion it must agree to significant tweaking of its time-bound action plan and structural benchmarks.