Mid-term budget review report

The government's mid-year review report tabled before the National Assembly was dated as it contained data only for the first six months of the year while data for major macroeconomic indicators for the first eight months of the year is available on different websites including the Pakistan Bureau of Statistics, State Bank of Pakistan, Commerce Ministry, Federal Board of Revenue, Power Division whose data was recently challenged by the regulator Nepra, Ministry of Planning and Development and Ministry of Industries. Be that as it may, certain comments made in the report that reflect the government's intent going forward need to be highlighted.

The revenue outlook states that while the number of filers has increased to 2.7 million yet actual revenue has not increased therefore "increased enforcement and monitoring measures are required to achieve the annual targets." This claim can be challenged on two grounds. First, the revenue target agreed by Pakistan's economic team leaders with the International Monetary Fund (IMF) was grossly unrealistic at the time of the loan agreement, and again subsequent to the first review. It is not yet known what the two sides have agreed to as the target for the rest of the current year during the second review as the report has not been uploaded by the IMF yet, however in the first review, the target for next year is 6.799 trillion rupees against the original target for the current year of 5.5 trillion rupees downgraded to 5.23 trillion rupees during the first review. Sadly, there is no acknowledgement in the report that the target was unrealistic to begin with especially given the projected growth rate of 2.4 percent in the current year as contained in the budget documents.

And secondly, the government did not undertake any major reforms in the tax structure itself and instead focused on either expanding the tax on existing taxpayers by raising sales tax to 17 percent on all products, or attempted to make the difference in the withholding tax in the sales tax mode payable between filers and non-filers as a way to increase the number of filers which led to those who were not eligible to pay tax in any event to file their returns. These policies were in practice during past administrations as well and like in the past they compromised the capacity of the government to contain the budget deficit. It is also relevant to note that one way out for previous administrations in times of a revenue shortfall was not to pass on a decline in the international price of oil, a policy that was supported recently by the Khan administration by doubling the petroleum levy. The mid-year review states that "one of the consequences of falling short of revenue targets would be curtailment in development expenditure" - again a policy in practice during previous administrations though in the past no government rather inexplicably raised budgeted current expenditure by a whopping 40 percent in one year.

There is thus clearly a disconnect between the ministry of finance and the FBR in determining what doable is, how long it may take to undertake the necessary and clearly identified reforms, which other government ministries/departments cooperation is required to implement the reforms and the capacity-building required within these institution(s).

Interestingly, the review report notes that "the historical trend has been that the demand for non-development expenditure increases manifolds in the second half of the financial years especially in the fourth quarter warning that "supplementary grants will occur," which if over and above the 40 percent raise in current expenditure in the current year is a very disturbing though. The report also claims that development budget will not be cut belying the statement cited above that there will be curtailment in development expenditure.

The report further argues that releasing funds for the PSDP would "foster growth and create employment." This premise too can be challenged given the sustained negative growth in large-scale manufacturing sector attributed to not only domestic policies (high discount rate, failure to release refunds, raising taxes on petroleum and products making our products uncompetitive and the locust attacks) and external factors (coronavirus that has begun to choke off foreign direct investment mainly from China, and the continued outflow of hot money as global markets remain in the grip of uncertainty due to Russia-Saudi Arabia differences in reducing output impacting on the oil price). It is about time the government revisited its policies and took both internal and external factors into consideration when engaging with the IMF for the third review before the budget is presented.

Disturbingly, the report's final sentences are ominous because they reflect that there is to be neither acknowledgement of the unrealistic targets set by the government nor of the negative fallout of the policies and their pace of implementation on key sectors but particularly the poor and the vulnerable: "it is essential to mention that to address multiple challenges faced by the economy the government has initiated various measures. The impact of these measures has started to emerge in better performance of key economic indicators. Keeping in view the positive developments in major sectors, the economy is likely to achieve better growth prospects." This narrative must change because it has few if any adherents outside the cabinet and the Prime Minister's considerable political capital is being eroded at breakneck speed.