Finance Division in the January 2023 Economic Update/Outlook noted that fiscal deficit July-November 2022 was 1169 billion rupees against the July-October figure cited in the December Update of 1266 billion rupees – a decline of 43 billion rupees in November compared to October 2022.
Two observations are in order. First, the precise amount spent on current expenditure and all its components, including unfunded (not part of the budget) mark-up, defence, subsidies, pensions, and running of civilian government, are not itemized in the Update/Outlook which obviously renders any analysis on why the budget deficit declined an impossible task.
Be that as it may, the January Update/Outlook notes that fiscal accounts are “under immense pressure on account of heavy interest payments and rehabilitation spending”. And the December Update/Outlook notes that “the first four months of FY 2022 have witnessed a higher expenditure growth on the back of higher mark-up payments.
Currently, the government is facing an unprecedented challenge of providing relief to flood-hit areas. The government is providing relief through Kissan package and Benazir Income Support Programme (BISP).”
The claim of higher mark-up payments is difficult to rationalize as the interbank rupee was controlled post-October 2022 till 26 January 2023 which accounted for: (i) understating the budgeted debt servicing and repayments as and when due but in rupee terms – payments which had to be paid off in dollars that led to a steady decline in foreign exchange reserves which currently stand at around 3 billion dollars or less than two weeks of imports; (ii) the widening differential between the interbank rate and the open market rate, over 40 rupees per dollar led to re-energizing the illegal hundi/hawala system with a consequent negative impact on remittance inflows; and (iii) the ninth International Monetary Fund (IMF) review remained pending accounting for less than 6 billion dollar inflows (as even friendly countries linked their pledged support to the success of the ninth review) against the requirement of nearly 40 billion dollars. Sadly, as in the past, no one is being held accountable for this flawed policy and the cost is being paid by the general public.
The claim that BISP rose in the aftermath of the devastating floods needs a revisit as well. The cash extended to the flood victims was adjusted in the 360 billion rupees budgeted under BISP. By 30 October BISP had disbursed 66,744,650,000 amongst 2,669,786 flood affected families estimated (25,000 rupees per family) estimated at over 97 percent of total disbursement
December Update notes that “total expenditure rose by 26.1 percent to 2737 billion rupees during July-October fiscal year 2023 against 2171 billion rupees in the same period of last year.
The increase is driven by a 34.4 percent growth in current spending.” This could well be on account of the unfunded 110 billion rupee of electricity subsidy to exporters announced on 6 October 2022 which continues to this day (though reports indicate that the visiting IMF mission is insisting it be withdrawn). And additionally though data for unfunded releases for the 1.8 trillion agriculture package announced end October 2022 and for infrastructure destroyed during the floods were understandably not released at least till end October yet more than two-thirds of this package as per the finance minister comprised of bank loans which, if past precedence is anything to go by, would be extended to those with collateral, or the elite.
Secondly, Public Sector Development Programme witnessed a severe curtailment this year – disbursements at 98 billion rupees July-October 2022-23 as per the December Update and 130 billion rupees July-November 2023 as per the January Update. The Ministry of Planning and Development notes July-December disbursement of 151.420 billion rupees or merely 21.42 billion rupees were disbursed in December.
The budgeted PSDP for the entire fiscal year is 727 billion rupees – 667 billion rupees budgeted allocation and 60,000 rupee foreign aid which implies that by July-November 19 percent of the total budgeted amount (excluding foreign aid component) was disbursed while July- December 23 percent of the budgeted amount was released. Thus against the required 50 percent disbursement of the budgeted PSDP the Dar-led Finance Ministry released only 23 percent no doubt in an attempt to balance the books, read reduce the unsustainable budget deficit.
PSDP is a major contributor to the growth rate which in terms has implications on total tax collected. The budgeted growth projection was 5 percent for the current year; however, FBR projected tax revenue of 403 billion rupees based on 4 percent growth rate – 121 billion rupees due to the growth rate and 403 billion rupees from a projected nominal inflation of 12.8 percent. While growth estimates today range from at best plus 2 percent to negative (based on large scale manufacturing sector’s performance going deeper in the red – from negative 2.9 percent (July-October) to negative 3.6 percent July-November) yet inflation is almost double the projection and hence there was a rise in revenue compared to the year before.
Data released by the Federal Board of Revenue (FBR) calculated a decline in sales tax collections by 519 billion rupees as per the consumption approach national accounts data (24 percent of total budgeted tax collections under sales tax), 542 billion rupees as per value added approach supply data and 550 billion rupees as per the consumption approach supply data. The major contributing items to this fall in collections were food, beverages, tobacco, textiles, wholesale and retail trade.
Inflation data provides further clarity. In May 2022, inflation was 13.8 percent, due to unfunded subsidies on petroleum products and electricity tariffs announced by the then Prime Minister, Imran Khan, on 28 February and reversed by the eleven- party coalition government in two phases - 28 May and 3 June 2022. During the following seven months (June to December) Consumer Price Index on average was 24.5 percent year on year.
The weekly Sensitive Price Index on average between July-December 2021-22 was 17.17 percent and rose to 28.21 percent in the comparable period of 2022-23. Wholesale Price Index rose from 21.461 percent in July-December 2021-22 to 34.1 percent in the comparable period of 2022-23. Thus it is little wonder that with such a high rate of inflation, consumption declined and with it collections under sales tax.
To conclude, flawed economic policies, failure to do an appropriate cost benefit analysis of these very same policies that were not as oppressive when implemented at a time when foreign borrowing was not an issue for this country (more due to geopolitical considerations than through good economic management) account for the current sustained economic impasse.
It is ironic that the people of this country are looking to the IMF rather than its economic team leaders for a reprieve given that since October 2022 all decisions/policies were elite-centered rather than focusing on the poor and vulnerable.
Copyright Business Recorder, 2023
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