EDITORIAL: The Khan administration has been citing the prevalence of exogenous elements as contributing factors to the current economic impasse notably the supply issues consequent to the Covid-19 pandemic and Russia-Ukraine tensions that have visibly escalated after the recognition of two breakaway Ukrainian regions — Donetsk and Luhansk — by President Putin that, as expected, has led to a rise in the international prices of oil and products, Pakistan’s major import items as well as a major source of revenue. These two external imponderables, without doubt, have a significant fallout on the budget exercise currently under way in the Ministry of Finance.
However, one would hope that the Ministry remains focused on factors that are within its control — a level of control that is compromised not only by the conditions agreed with the International Monetary Fund (IMF) which has shown little inclination to phase out the harsh upfront conditions but also political considerations, given the fact that domestic political temperature is ramping up.
In other words, the budget-making exercise must be geared towards the objective of slowly but surely increasing the country’s leverage with the Fund in terms of phasing out these harsh conditions by the next review on the one hand and sending a message to the public that the administration is engaged in implementing policies that would ease inflation rather than doling handouts which, without a rise in productivity, that simply fuel inflation making these handouts inadequate in no time. The question is what should this entail in terms of the budget?
The first line of action has to be a marked improvement in governance across the board but particularly in the appalling performance of the energy sector which has witnessed a rise in its circular debt from 1.2 trillion rupees in 2018 to 2.4 trillion rupees today — a debt over and above the rise in domestic debt from 16.5 trillion rupees in 2018 to 27 trillion rupees today and external debt of over 130 billion dollars today against 95.2 billion dollars in 2018.
The energy sector’s poor governance is also evident in its failure for the third year running to import fuel on time which has had serious repercussions on the country’s finances and productivity as well as the quality of life of households. It has been reported that the Oil Companies Advisory Council (OCAC) has warned the government and Oil and Gas Regulatory Authority (Ogra) in a letter that a supply crisis is looming in high speed diesel which would have a negative impact not only on industrial output but also farm output as the peak harvest season approaches. Needless to add, the cost of these inefficiencies is being paid by the general public not only through higher utility charges but also higher inflation.
There is a need for the budget formulators to try to shift existing reliance on indirect taxes particularly on petroleum and products to direct taxes. Reliance on direct taxes has declined from 39.7 percent in 2018 to the budgeted 37.4 percent in the current year, which needs urgent remedial measures.
In all fairness, the government is considering going after (i) high net worth individuals who are non-filers or non-payers, identified through Nadra data, but this idea has been touted since 2009/10 but has not been implemented due to legal lacunae, all of which have not yet been ironed out; (ii) drafting personal income tax legislation (which in 2018 was only 2.1 percent of GDP) that as per the Fund website is aimed at ‘simplifying the system, increasing progressivity, and supporting labour formalization’; and (iii) harmonization of General Sales Tax suggested by the Fund which is likely to face resistance as services are subjected to provincial taxation while goods are subjected to federal government taxation.
However, till such a time as revenue reforms are implemented and instead of pledging to remain committed to borrowing domestically, externally and through extending the repayment period to fund the budget as noted in the sixth review, the next budget should show a decline in the budgeted current expenditure by at least 1.5 trillion rupees through deferment of all major procurements by the civilian and defence administrations, cessation of pay rise for a year and last but not least to begin pension reforms that envisage contribution by the employees like the standard practice in the world.
This is critical as the G-20 Debt Service Suspension Initiative has expired in December 2021 estimated at over a billion dollars before Pakistan took advantage of this initiative and therefore is expected to be over a billion dollars next fiscal year.
The one basic design flaw of the current IMF programme to which the PTI government signed on, is the focus on primary deficit instead of the budget deficit which accounts for the massive rise in the country’s domestic and foreign indebtedness. One can hope that the incumbent Finance Minister takes appropriate measures to reverse this trend.
Copyright Business Recorder, 2022
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