Budget 2020-21

ARTICLE: The Ministry of Finance headed by Prime Minister's Advisor on Finance Dr Hafeez Sheikh incorporated most of the expenditure and revenue targets set by the International Monetary Fund (IMF) in the staff report on Pakistan government's request for Rapid Financing Instrument (RFI) dated April 2020 which, his critics maintain, made his job a lot easier, if not redundant.

Dr Sheikh's overwhelming responsibility for the budget 2020-21 was selling the IMF targets to the civilian and military leadership. That he succeeded is evident from the revenue and expenditure budgetary targets largely conforming to the IMF targets set in the RFI. However, there are concerns that the belt tightening agreed by the executive and the establishment may not be echoed in the rank and file and, perhaps, some discrepancies between the targets set in the RFI documents and the budget 2020-21 are designed to take account of erupting compelling political considerations. An example may be the allocation for subsidies with the IMF document projecting them at 303 billion rupees and the budget earmarking 209 billion rupees for the purpose. This provides around 94 billion rupee flexibility in terms of releasing additional expenditure and/or reducing taxes in the budget 2020-21 due to political considerations or due to the pandemic wreaking more havoc and for a longer period than projected on the economy. In addition 50 billion rupees has been set aside for contingencies next year, against 115 billion rupees in the outgoing year which was understandably used up after the onslaught of the coronavirus.

The Prime Minister in all likelihood was easily convinced to reduce expenditure (current and development) as long as his signature social sector Ehsaas programme outlay (which subsumes the Benazir Income Support Programme) was higher than in last year's budget. The budget documents indicate 208 billion rupees for BISP next year against the 180 billion rupees budgeted for the current year (though actual disbursement due to the pandemic was higher at 234 billion rupees).

And finally Razzak Dawood, the Advisor on Commerce, succeeded in convincing the Fund, the Prime Minister and the Advisor on Finance (in order of relevance) that the productive sectors must be provided fiscal relief (a total relief of 49.3 billion rupees has been extended in budget 2020-21 that includes 25 billion rupees customs relief, 26 billion rupees inland relief and 1.7 billion rupees through inland revenue measures). The rationale provided was that tax relief would jumpstart the economy thereby bringing in more revenue through enhanced economic activity. In the event of failure blame can easily be laid at the doorstep of the (i) pandemic, and/or (ii) on the Chairman FBR if she fails to generate the revenue target agreed with the IMF, and/or (iii) on Dawood who failed to enhance exports in spite of these concessions.

Dr Sheikh's budget by and large adheres to the IMF-stipulated targets with extremely minor adjustments. This is evident from the following revenue and expenditure allocations as stipulated in the RFI documents and in the budget 2020-21: total revenue of 7.3 trillion rupees out of which tax revenue target for the Federal Board of Revenue was 5.1 trillion rupees (with the budget's target set at 4.9 trillion rupees), direct tax collections of 2.1 trillion rupees (budget target 2.04 trillion rupees), sales tax target of 1.9 trillion rupees, and IMF's target of 489 billion rupees as petroleum levy against the budget target of 450 billion rupees. The difference in collections under the petroleum levy is in all probability due to the difference in the projected international price of oil. The IMF's RFI documents project current expenditure at 6.27 trillion rupees (against the budget's allocation of 6.3 trillion rupees), Public Sector Development Programme envisages an outlay of 586 billion rupees (budget allocating 650 billion rupees) - a deviation of 64 billion rupees however as this expenditure item is where the slash at the end of the year is the norm the Fund may have had a comfort level with this discrepancy.

A significant deviation between the budget and the IMF is in the (i) GDP growth rate for the current year at negative 0.4 percent giving a total of GDP at market prices of 41.7 trillion rupees. The IMF projected the growth rate at negative 1.5 percent which by itself would negate nearly all critical macroeconomic projections for the outgoing year (tax to GDP, current expenditure to GDP, fiscal imbalance) and which, in turn, would impact negatively on the GDP for next year which is projected at 45.5 trillion rupees and thereby undermine the validity of key macroeconomic projections for next year; (ii) inflation is projected at 6.5 percent in the budget for next year which is at odds with the 8 percent forecast by the Fund. This would imply that if the monetary policy committee chaired by the Governor State Bank of Pakistan continues to base the discount rate on Consumer Price Index instead of on core inflation then the discount rate is unlikely to be brought down significantly which may act as a disincentive to borrow by the private sector. This in turn may prompt the sector to hesitate if not refrain from taking advantage of the fiscal incentives in the budget; and (iii) net general government debt (including IMF) has been projected at 77 percent by the Fund (5.6 percent higher than the pre-Covid-19 target) while the budget document gives the total net public debt at 83.1 percent of GDP.

Two components of the budget that must raise serious concern for the federalists are: (i) provincial share of taxes for next year has been earmarked at 2.87 trillion rupees (against last year's budgeted target of 3.25 trillion rupees) - a decline of nearly 11 and a half percent in spite of the envisaged rise in collections (internal resources) from 3.988 trillion rupees in the revised estimates to 5.4 trillion rupees for next year (inclusive of the provincial surplus; and (ii) provincial surplus of 242 billion rupees against the 423 billion rupees budgeted in the outgoing year with negative 80.6 billion rupees from this source in the revised estimates.

While the budget does make an obvious attempt to reduce the budget deficit to 7 percent next year, a consideration that was lacking in last year's budget, yet there are too many ifs and buts (excluding the raging pandemic in Pakistan coupled with global recession) to give any comfort level to the public that the economy is embarked on the right path. However, if the government can vigorously launch governance reforms in institutions it controls (including the state owned entities) then there would certainly be a light at the end of the tunnel though the journey to be traversed to reach the light is unlikely to be less than four to five years. Sadly, a public's patience normally does not extend beyond two to three years and with two thirds of this time already past the Khan administration may have to make concessions though one would hope that the concessions are not in slowing down or abandoning the reforms.