EDITORIAL: The Finance Division as per practice uploaded the Monthly Economic Update and Outlook for November 2023 on its website in which it pointed out that Federal Board of Revenue (FBR) collections increased by 27.9 percent during the first quarter of the current year as against the same period of last year - to 2,748 billion rupees from 2,149 billion rupees while non-tax revenue (mainly petroleum levy) by 114.7 percent, from 211 billion rupees last year to 453 billion rupees this year – but that higher markup payments may place significant pressure on the expenditure side.
There is no doubt that additional taxes estimated at 415 billion rupees were imposed in the Finance Act 2023, mainly applicable on existing taxpayers, and the rate of petroleum levy raised from 50 rupee per litre to 60 rupees per litre, which explains the International Monetary Fund (IMF) team’s recent visit to Pakistan to engage with relevant authorities to reform the tax structure and render it fair, equitable and non-anomalous; however, the steady rise in debt servicing is a trend evident for decades and has long presented any serious effort to reduce expenditure.
The Update notes that “total expenditure stood at 3,648.6 billion rupees during the first quarter of 2024 against 2,836.3 billion rupees in the same period of last year, thus growing by 28.6 percent.
Current expenditures grew by 25 percent to reach 3,172 billion rupees against 2,538.1 billion rupees last year. Within total current expenditure, markup payments experienced a substantial surge of 44.6 percent, primarily attributable to a higher policy rate.” Two observations are in order.
First, the data is for the first quarter only, July-September, and is therefore dated. In addition, the 44.6 percent raise in markup is clearly on domestic debt as the Update refers to a high policy rate as a major contributor to the surge.
This would imply a 707 billion rupee addition to markup payments – calculated on the basis of total budgeted 6,430 billion rupee markup, with 1,607.5 billion rupees per quarter. And second, it is relevant to note that the policy rate has been constant for the first quarter of this year (1 July) at 22 percent, it was upped to 22 percent on 27 June 2023, and hence this surge no doubt indicates more than the budgeted domestic borrowing of 5 trillion rupees was incurred during the first quarter with the bulk borrowing through Pakistan Investment Bonds, treasury bills, and only 1.9 trillion rupees budgeted from national savings schemes – borrowings that have a highly inflationary impact that may well account for 29.2 percent Consumer Price Index for November 2023.
The Update refers to growth in non-markup spending restricted to 13.2 percent but with expenditures under running civilian government and pensions as stimulating growth though subsidies and grants were reduced massively, as were releases for development expenditure.
One would hope that this acknowledgement would strengthen the resolve of the administration to reform the pension system to ensure employee contribution for all those retiring from now onwards.
Remittances declined by 13.3 percent July-October 2023 compared to the corresponding period of the year before and one would hope that the decision of the caretaker Finance Minister, announced on 15 September, earmarking 80 billion rupees for schemes to encourage workers’ remittance inflows through official channels will begin to bear fruit.
While acknowledging, that the decline in official inflows last year is due entirely to the flawed policy of the previous finance minister Ishaq Dar to control the interbank rupee-dollar parity without the necessary reserves to intervene in the market reenergized the illegal hawala/hundi system, luring back remitters into sending money through official channels will almost certainly take some time.
Foreign exchange reserves on 23 November 2023 were 7.2 billion dollars against 7.5 billion dollars on the same day last year – reserves that one would hope are strengthened through the inflow of 25 plus billion dollars of pledged foreign direct investment from GCC countries and China though inflows till end October this year were slow with foreign direct investment at 538.8 million dollars, up from 457.3 million dollars in the comparable period of the year before.
There are certainly some signs of revival, including 0.68 percent positive growth in Large-Scale Manufacturing (LSM) sector July-September, but of concern is the negative 291.1 percent growth in credit to private sector from July to 6 October 2023 against negative 94.3 percent in the comparable period of the year before while the current account deficit has declined by 65.9 percent - from 3.1 billion dollars July-October 2022-23 to 1.05 billion dollars in the comparable period of this year.
The fact is that the economic impasse was simply too severe for any meaningful uptick in half a year and therefore expectations must be tempered by what is realistically possible in a given timeframe.
Copyright Business Recorder, 2023
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