Medium-term budgetary strategy

The Medium-term Budgetary Strategy paper (MTBS) has been released recently by the Federal Ministry of Finance following its approval by the Federal Cabinet. The Minister of Finance and Revenue, Shaukat Tarin, will present and discuss the Budget Strategy Paper with the Standing Committees for Finance and Revenue in the National Assembly and Senate.

The MTBS paper is for the next three years up to 2023-24. This largely coincides with the remaining duration of the tenure of the PTI Government which will be presenting the budgets for 2021-22, 2022-23 and 2023-24 as it completes its five-year tenure. Therefore, it should be seen as a ‘Vision Statement’ by the incumbent government for its remaining tenure on the fiscal front as to which structural reforms and policies that it proposes to implement both on the revenue and expenditure fronts.

The MTBS paper states that it is prepared on a three-year rolling basis. This is probably in recognition of the fact that considerable uncertainty exists about the next three years. This is especially the case now about how long will the attacks of Covid-19 persist globally and in Pakistan? In fact, there has been a big intensification in the impact of the third attack of Covid-19 during the last two weeks. This may materially affect the budgetary outcome in 2020-21 more than anticipated and achievement of the projections for 2021-22 in the MTBS paper.

Therefore, a more prudent policy might have been to delay the finalization and not release the MTBS paper until there was an assessment that the worst of Covid-19 attacks is over. The fundamental question is whether or not the Government has locked itself into an over-ambitious and unrealistic budget for 2021-22 in the face of the emerging economic developments.

Clearly, the pressure is to show progress on the budgetary front now that Pakistan has re-entered the Extended Fund Facility of the International Monetary Fund (IMF) from the sixth review onwards. The IMF Staff Report has been released after the completion of the second to fifth reviews on the 8th of April 2021. The report contains a detailed set of projections on the General Government Budget from 2020-21 to as for ahead as 2025-26. These have presumably been prepared in agreement with the Government of Pakistan.

The targets embodied in the IMF projections are extremely ambitious. Perhaps with a magic wand the revenues to the GDP ratio will go up from 15.8 percent of the GDP in 2020-21 to 17.6 percent of the GDP by 2025-26 and the total expenditure will be slashed down from 22.9 percent of the GDP to 20.6 percent of the GDP during these years. Consequently, the budget deficit will come plummeting down from the projected 7.1 percent of the GDP in 2020-21 to only 3.0 percent of the GDP in 2025-26. If there is an exercise in ‘wishful thinking’, this is probably it.

The MTBS was probably expected to be consistent with the IMF projections at least for 2021-22 and 2022-23 when the budgets for these years will be presented during the tenure of the present Fund Programme up to September 2022. Therefore, it is necessary to see the matching of the two sets of projections at least for the next two years.

There is a difference even in the base year, 2020-21, of the projections. The IMF expects the deficit at 7.1 percent of the GDP whereas MTBS projects it at a somewhat higher level of 7.4 percent of the GDP. Presumably, there will be lower growth in revenues now in May and June 2021 due to the ravages of COVID-19. For example, the petroleum levy has been brought down sharply to keep petroleum prices unchanged. Also, there are likely to be some higher relief and health expenditures in the next few weeks. The likely outcome is that the budget deficit could even exceed 8 percent of the GDP. It may even be one percent of the GDP higher than the Government’s projection and approach 8.4 percent of the GDP.

The critical target is the extent to which the budget deficit is to be brought down next year. The IMF projection is of 5.5 percent of the GDP while the MTBS paper states that it will be brought down to 6 percent of the GDP. Either way, the reduction is close to 1.5 percent of the GDP. Even under normal conditions, with a fast-growing economy and rapidly increasing revenues, this would be considered an ambitious target. Now with Covid-19, if it persists beyond June, then it may be well-nigh impossible.

The change in the projections in the MTBS for 2020-21 and 2021-22 in relation to the original IMF projections have probably been made with the concurrence of the IMF. But even with some reduced targeting of revenues, the Federal Budget of 2021-22 will require taxation proposals of up to Rs 800 billion. It could be over Rs 1050 billion if the petroleum levy is not brought up back to Rs 30 per liter.

The Federal Budget for 2021-22 will need to be presented in the next six to seven weeks. This may be the time when Covid-19 is still at its peak. Therefore, an understanding must be reached with the IMF that initially a relatively ‘soft’ budget will be presented with no significant new taxation and with enhanced provision for relief expenditure. Hopefully, as the pandemic wanes, a Mini-Budget can be presented later in 2021-22 with significant additional taxations. Given the strong humanitarian posture of the IMF, this should be accepted as the appropriate strategy.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021