ARTICLE: Pakistani budgets require little executive input, so argue Ministry of Finance officials, as there is little flexibility in terms of changing allocation priorities while revenue generation remains hostage to the influence peddlers. The bureaucracy rightly warns all administrations against the incalculable and long-term damage to the economy in the case of default on debt. There is also the general perception amongst members of the executive that not raising salaries of government servants in each budget would not only lead to severe criticism by the leaders of the opposition (if past precedence is anything to go by) but, more critically, alienate the bureaucrats. The establishment's demand for funds is premised on ensuring that they are sufficient to deal with myriad security threats facing the country. Flexibility in allocation priorities in the budget therefore is limited to the development budget. There have not been too many years when the actual budgeted allocation on Public Sector Development Programme (PSDP) was actually disbursed by the end of the fiscal year nonetheless a raise in budgeted allocation for PSDP from one year to the next is invariably accompanied by loud proclamations by the executive of the budget being pro-poor - in terms of increased allocation for physical infrastructure that would generate jobs and/or for social infrastructure that would improve the quality of life. Raising revenue through widening the tax net is a challenge that has yet to be met given the plethora of cartels/interest groups operating in this country that continue to evade/avoid taxes (tax avoidance is being legislated as illegal in several countries though not yet in Pakistan) and the 50 percent reportedly operating outside the legal economy have so far successfully resisted all attempts to bring them into the tax net. Revenue targets were upped on 12 May 2019 to 5.5 trillion rupees on the understanding that all those out of the tax net would be brought in within the year, an unrealistic assumption as powerful pressure groups should have been expected to resist such moves. Be that as it may the government claims tax revenue has risen but this rise is not attributable to widening the tax net but on increasing the rate of taxes on existing taxpayers which explains why the Large Scale Manufacturing (LSM) sector continues to shrink and the quality of life of households continues to deteriorate as their income is eroded. Tax collections are linked to the growth rate - the higher the growth rate the higher the collections. Growth is linked to expansionary policies - the reverse of what was agreed by the Pakistan economic team leaders in May 2019. However, the Pakistan Tehrik-i-Insaaf government inherited an unsustainable current account deficit of 20 billion dollars. However, at the time that the new economic team was inducted by the Prime Minister (Dr Hafeez Sheikh was appointed on 20 April 2019 and Dr Reza Baqir on 6 May 2019) the current account deficit had already come down to 11.58 billion dollars based on corrective policies by the Asad Umer-led Finance Ministry and the then State Bank Governor Tariq Bajwa. The deal struck with the IMF on 12 May 2019 included: (i) a high interest rate (12.25 percent) to check inflation but which also raised the cost of borrowing thereby stifling private sector borrowing and therefore its productive activity; the Monetary Policy Committee further raised the rate by another 100 basis points by 20 July 2019; (ii) massive rupee depreciation to discourage imports under the guise of following a market-based exchange rate policy which also discouraged raw material and intermediate products imports; the rupee has been undervalued since December 2018 which has discouraged imports while exports have not responded as positively as expected to an undervalued rupee; and (iii) widening the tax net to raise revenue without a reduction in expenditure were policy decisions that would slow down the pace of the economy and the IMF projected a low growth rate of 2.4 percent. The extent of the contractionary policies came under massive criticism as economic activity was stifled with a consequent negative impact on employment opportunities and an alarming rise in the numbers under the poverty line which the Benazir Income Support Programme/Ehsaas has been unable to deal with. In years when the budget deficit reaches unsustainable levels compelling the country to seek an International Monetary Fund (IMF) usual three-year programme (22 programmes in Pakistan's 73-year history), Pakistani administrations typically slashed PSDP, considered to have far less negative political implications than reducing current expenditure. This explains why a much hyped mega project's implementation can be delayed/postponed from one administration to the next - a fact which indicates multiple inaugurations by heads of government and/or head of state during military dictatorships. Frequent reliance on IMF bailouts accounts for the country never witnessing a budget deficit in double digits, the exception being 1975-76 when it reached 10.3 percent of GDP, due to the Zulfikar Ali Bhutto government's significant increase in public sector expenditure. What has been a marked change during the current IMF programme (suspended due to Covid19) is that the focus is not on the budget or fiscal deficit but on the primary deficit (minus borrowing costs) - the expenditure item that has consistently risen in absolute terms as well as percentage terms reaching an all time high of 45 percent of total tax revenue last fiscal year as per the revised estimates. The situation for the current year is further complicated by the fact that at the time of the IMF staff level agreement on 12 May 2019 (one month and 18 days before the end of the fiscal year) the government grossly understated the budget deficit at 7.2 percent of GDP with the IMF agreeing to the same deficit in the current year i.e. 7.2 percent. However, the actual figure released in August 2019 gave a budget deficit of 8.9 percent for 2018-19 and if one assumes that this would have led to an upward adjustment to 8.9 percent pre-Covid-19 by the IMF then the 9.2 percent post-Covid-19 indicated in the April 2020 document titled Pakistan's request for Rapid Financing Instrument- staff report envisages a raise of only 0.3 percent. This is almost certainly an under-estimation by at least 2 percentage points especially if the government has actually disbursed the amount allocated under PSDP as noted on the Ministry of Planning website. To conclude, if as per the IMF the growth rate is negative 1.5 percent for the current year, budget deficit is at an unsustainable 9.2 percent of GDP, the primary balance is estimated at negative 2.7 percent including grants is the projected tax to GDP ratio rise of 13.3 percent next year and a primary deficit of negative 0.3 percent by end of next year realistic? At first glance likely only if the economy is further stifled (though many maintain it had already reached rock bottom pre-Covid-19) however job losses may well reach the high of the lockdown weeks eroding Imran Khan's popularity even further. This would put pressure on the government to either reverse policies or else push it into further reliance on the civilian and military establishment to stave off any existential threat. The way out is to launch governance reforms particularly in the perennially poor performing critical sectors i.e. tax and power. This is the first part of a two-part series of articles highlighting some random thoughts on the budget 2020-21, and next week's article would further highlight some associated thoughts.
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