How will the economy fare in this budget?

ARTICLE: Budget 2020-21 is as much about optics as previous budgets with reference to over optimistic sectoral and expenditure/revenue targets premised on flawed over-stated data for the outgoing year released in the Economic Survey 2019-20, while the International Monetary Fund's (IMF) leverage is unmistakably evident in nearly all budget allocations and revenue generation proposals.

Optimism based on data for the current year (yet to be reconciled by end July or end August as in the year before) includes negative 0.4 percent GDP growth, 11 to 12 percent inflation, FBR tax to GDP 9.4 percent (though Hammad Azhar in his speech mentioned total tax revenue which was estimated at 11 percent of GDP), and fiscal balance negative 9.1 percent on which next year's projections, defined by skeptics as the administration's wish list, are based: 2.1 percent GDP growth, 6.5 percent inflation, 10.9 percent tax to GDP and negative 7 percent fiscal balance which is a realistic target if the budgetary allocations and revenue targets are met. And for the record the total public debt (gross) rose from 70 percent in the revised estimates of 2017-18, (with the PML-N in power for 11 months of the year) to 86.8 percent in the current year and is budgeted to rise to 87 percent next fiscal year. Public debt net is set to double next year - from 623.8 billion rupees to 1178 billion rupees in 2020-21, a rise of 89 percent with inflationary implications.

Covid-19 yet to peak in this country, with the Prime Minister extending the time-frame of the virus peaking three times already, injects considerable uncertainty into the budget exercise that may require adjustments during next fiscal year. The nature and extent of these adjustments would not only depend on the effects of the virus on the poor and vulnerable as well as on the productive sectors but would also be a function of the government's political considerations which are closely entangled with influential groups increasingly being referred to as the 'mafia' by senior members of the executive though their hold on decision making does not appear to have been loosened in the 22 months of the PTI government.

The IMF leverage is manifest in the following budget components: (i) total revenue target of 4.9 trillion rupees which matches the target set by the IMF in its Rapid Financing Instrument documents uploaded on its website in April 2020, a target considered unrealistic given the growth rate of 2.1 percent for next year and the uncertainty surrounding Covid-19's onslaught in Pakistan. No new taxes, so claimed Dr Hafeez Sheikh a day earlier, and this was restated by Hammad Azhar during the budget speech who added that the relief on taxes is budgeted at 49.3 billion rupees including a relief of 25 billion rupees on imports (customs duty, additional customs duty and regulatory duty) which is expected to would generate higher productivity in the country which, in turn, would increase tax collections. The government has budgeted to increase income tax collections - from 1.6 trillion rupees collected in the revised estimates of 2019-20 to 2 trillion rupees in the next fiscal year (25 percent rise), other taxes from 300 billion rupees in the revised estimates to 501 billion rupees next year (67 percent rise) with petroleum levy from 260 billion rupees in the revised estimates of the current year to 450 billion rupees next year (73 percent rise); (ii) current expenditure is to be reduced to 6.34 trillion rupees from the revised estimates of 7.3 trillion rupees in 2019-20 (14 percent decline) and with zero foreign loan repayment nonetheless the markup payment on domestic loans would raise debt servicing to 2.94 trillion rupees against 2019-20's revised estimate of 2.70 trillion rupees (9 percent increase); (iii) pension (civilian and military) and defense allocations have been contained with a marginal rise of 1.5 percent and 5 percent respectively; (iv) grants to others which contained the Prime Minister's signature Ehsaas programme has been reduced from 1084 billion rupees to 819 billion rupees (24.4 percent). Hammad Azhar in his speech revealed that the Ehsaas programme would be allocated 208 billion rupees next year; (v) subsidies have been reduced from 349.5 billion rupees to 209 billion rupees with a massive reduction to the power entities - from 201 billion rupees in the revised estimates of the current year to 124 billion rupees next year or 38 percent reduction; subsidy to the Utility Stores would face a cut of 99 percent (from 43.5 billion rupees in the revised estimates to 3 billion rupees this year and surprisingly zero allocation is envisaged for Corona stimulus against 10 billion rupees in the revised estimates of 2019-20 however the item subsidy to others would be 49.5 billion rupees including wheat subsidy to Gilgit Baltistan, Metro bus subsidy, fertilizer plant subsidy and the bulk 30 billion for Naya Housing Authority.

Allocation for Public Sector Development Programme (PSDP), that spearheads economic activity in Pakistan, has been reduced by 7.2 percent - from 2019-20's budgeted total of 701 million rupees to 650 million rupees; while provincial public sector development programme has been reduced by 26 percent - from the budgeted amount of 912 million rupees to 674 million rupees. Total PSDP has been reduced from the budgeted 1.6 trillion rupees to 1.32 trillion rupees - a reduction of 18 percent. This reduction is disturbing for two reasons: first, it would compromise the capacity of provinces to provide for the critical devolved subjects notably education and health (with Prime Minister Khan pledging repeatedly that his administration would ensure access of the poor and vulnerable); and second it will have negative implications on the growth rate and employment opportunities.

How will the economy fare in this budget? Fiscal policy is contractionary envisaging higher tax collections on existing tax payers though part of the raise is going to be illusory as the growth rate militates against a significant raise in taxes, while the government's reduction in expenditure, including in salaries and pensions, maybe vigorously opposed by the rank and file that may lead to some reversals. And if monetary policy remains as contractionary in terms of discount rate and the rupee dollar parity as last year the impact on the economy and the general public would be devastating.