The relief package

This week past the Prime Minister announced a series of populist measures that opponents decry are targeted to break the Opposition’s momentum to topple his government while his supporters argue that the measures reflect his concerns for the general public and particularly the poor and vulnerable. Independent economists however maintain that whatever the rationale behind the measures the key question is their sustainability or lack thereof.

The Prime Minister and his cabinet members have defended the measures by pointing out that their sustainability is premised on three factors. First, the revenue collection has been very good for the past seven months, well above the target, and hence there was money in the kitty. Data released by the Federal Board of Revenue (FBR) indicates collections July-February 2022 amounted to 3799 billion rupees (against the target of 6.1 trillion rupees by year end) against 3074 billion rupees in the comparable period the year before (against the 2020-21 budgeted target of 4.96 trillion rupees).

Three observations are critical. First, July-December tax collection figures reveal that around 61 to 62 percent of the budgeted amount is realized during the first eight months and if the government achieves its budgeted target of 6.1 trillion rupees by fiscal year end then that amount was budgeted with a projected budget deficit of 6.9 percent.

The relief package envisaging lower non-tax revenue (petroleum levy and sales tax on petroleum products almost zero pledged for the next four months) and higher expenditure would imply a higher budget deficit by at least 1.5 percentage points, an inflationary policy; (ii) the rise in Federal Board of Revenue (FBR) collections. Revenue for the first eight months is sourced to imports that rose to 52.5 billion dollars against exports of 20.5 billion dollars July-February 2022 which account for an unsustainable widening of the trade deficit to negative 31.9 billion dollars, projected to rise to over 50 billion dollars by year end.

This in turn will put greater pressure on the balance of payment position than what the Khan administration inherited. The International Monetary Fund (IMF) in its sixth review report advised the State Bank of Pakistan (SBP) to use the exchange rate as a ‘shock absorber’ that may lead to a faster eroding rupee and higher import costs that would be passed onto the consumers. Exports in contrast have risen but mainly because of the higher prices of our major export items in the international market attributed to the pandemic and more recently to the Russia-Ukraine war rather than to higher volume of exports. In other words, the cost of higher FBR revenue collection from imports implies a higher trade deficit, eroding foreign exchange reserves, and lower external rupee value. To meet these disturbingly worsening macroeconomic indicators the government would have to rely even more on borrowing than envisaged at the time of the budget, a trend evident during the past three years in spite of rhetoric to the contrary: domestic debt has risen from 16.5 trillion rupees in 2018 to over 27 trillion rupees today while foreign debt has risen from 95 billion dollars to over 130 billion dollars today with the government acknowledging in parliament that it used 10 billion dollars for budget support.

Second, non-tax revenue would decline dramatically due to the relief measures announced. The government had budgeted 610 billion rupees under petroleum levy however for the next four months the Prime Minister has pledged that petroleum prices would remain constant which implies that the collections under this head would barely be half of what was budgeted. Sales tax on petroleum and products has also been reduced to almost zero.

The government as per Finance Minister Shaukat Tarin is considering diverting dividends from its shareholdings in state owned companies including OGDCL (government stake at 85 percent), PPL (government stake at 78 percent), Mari Petroleum, etc., to fund this relief package as per the Finance Minister Shaukat Tarin — dividend income that he stated last year was not paid due to the liquidity crunch.

While speaking at a function in Karachi in September last year, Tarin stated that “if the liquidity crunch (due to circular debt) is not allowing energy firms to pay dividend to shareholders, then they can declare dividend and clear circular debt. The government does not need money (dividend) and companies can use dividend income to reduce circular debt.” He further rightly clarified that “the government will remain a beneficiary of high dividend payments regardless of whether it receives dividend income from the companies or use the money to reduce the circular debt…if the strategy (paying higher dividend) helps to pay off circular debt of around 300-400 billion rupees, then it will be a positive development as this (higher dividend payment) will increase the valuation of companies, which are heavyweights in the stock market.” Tarin concluded during the event that “the discovery of true valuation may later allow us (the government and state-owned companies) to issue GDRs (global depository receipts).” GDRs are listed on the stock market and are best described as shares issued to global investors to raise equity financing in foreign currency. There is no doubt that Tarin’s proposal was economically sound however sadly his post relief package statement that this amount may be used for the relief package smacks of political considerations once again taking the front seat to economic considerations.

And finally, the relief measures are all expenditure guzzlers — be they funded from taxes or from non-tax revenue — though their exact quantification will be determined as events unfold globally and as domestic policies are adjusted (or not) accordingly. A rough estimate of the cost of the relief measures is as follows: (i) rise of about 11.4 billion rupees for an additional 2000 rupees for the 5.7 million existing Benazir Income Support Programme (BISP) beneficiaries — an amount more than budgeted by fiscal year end; and (ii) ten rupee per litre decline as well as reduction in the electricity price by 5 rupees per unit would imply higher subsidies, a guesstimate for four months is around half 500 billion rupees, though as noted above the exact amount would depend on the international price of fuel and external rupee value.

The relief package is clearly violative of the agreement with the IMF that secured the recent tranche release - the agreement included raising the base electricity tariff and passing on the fuel adjustment charges onto consumers as well as passing on the international oil price to consumers and generating about 700 billion rupee (budgeted) revenue through petroleum levy and sales tax on petroleum and products. Disturbingly, the fiscal space claimed by the Prime Minister and the Ministry of Finance does not appear to be backed by ground realities.

Copyright Business Recorder, 2022