The logjam in the economy continues

EDITORIAL: Former finance minister Dr Hafiz Pasha recently maintained that the revenue shortfall that he projected at 250 billion rupees by year end, coupled with drying out of conventional relatively cheaper external financing arrangements will compel the government to announce a maxi as opposed to a mini-budget. He further contended that the government’s assumption of raising revenue this year by 40 percent is unrealistic and at best it would achieve 20 percent growth that would mean a shortfall of 1700 billion rupees in the current fiscal year.

Three observations are in order. First, the Federal Board of Revenue (FBR) has claimed that the shortfall from the target collections for the first three months contracted by 11 billion rupees – from 98 billion rupees during the first two months to 87 billion rupees in the first three months of the current year due to collections of 996 billion rupees in September against the target of 985 billion rupees for the month.

However it is unclear whether this increase is due to the increase in the filed tax returns, from 1.3 million to 3.6 million, implied by the Finance Minister as a major achievement or whether this is due to a rise in collections under indirect taxes whose incidence on the poor is greater than on the rich. Or, in other words, whether the envisaged reforms remain focused on generating higher revenue, as has been the case in the past, rather than on implementing the much needed structural changes designed to generate revenue premised on the ability to pay principle.

Second, Dr Pasha noted that the 2.5 trillion rupees budgeted profit of the State Bank of Pakistan, cited under non-tax revenue, would not be realised and projected 1.25 trillion rupees for the current year under this head. Disturbingly, in spite of repeated rhetorical claims, the government remains ominously silent on exactly by how much it has reduced current expenditure, as any reduction would automatically reduce the pressure to generate more revenue from an already heavily taxed populace.

The budget for the current fiscal year envisaged a massive rise in current expenditure, to the tune of 21 percent, an inexplicable increase given the extremely fragile state of the economy.

The usual practice of slashing development expenditure has never been supported by economists as it has negative repercussions on the country’s growth rate, as public sector investment remains a prime driver of growth in this country; and needless to add a decline in growth would further reduce the budgeted tax collections attributed to the budgeted 3.5 percent growth rate.

And finally, Dr Pasha claimed that borrowing from foreign commercial banks is at the high rate of 11 percent, despite the recent upgrade by Fitch and Moody’s.

At the time of the upgrade Business Recorder had pointed out that the upgrade retained the country in the high risk category and that interest rates on borrowing from commercial banks abroad or on debt equity (issuance of sukuk/Eurobonds) are unlikely to decline to affordable levels. It is relevant to recall that the then caretaker finance minister, Dr Shamshad Akhtar, categorically stated earlier this year that it was simply too expensive to borrow from the commercial sector abroad or to rely on issuing debt equity.

Dr Pasha claimed that the decline in inflation has been understated by 3 to 4 percentage points and that it currently stands at 12.5 to 13 percent.

However, he projected that inflation would rise as the government begins to implement the policy of a market exchange rate agreed with the International Monetary Fund and added that the Fund team assessed a rate of 320 rupees to the dollar at the time the staff-level agreement was reached on 12 July 2024 when the administrative control measure in place was lifted – restricting imports by delaying opening of letters of credit.

It is important to note that the logjam in the economy continues and the constant reiteration by the executive branch of government that the country’s economic performance is improving is not echoed in the sentiments of the public as there is simply no feel good factor.

Business Recorder has consistently supported a 1.5 to 2 trillion rupee decline in the budgeted current expenditure that requires voluntary sacrifice by all major recipients followed by meaningful pension reforms. To consider raising revenue through a maxi-budget carries the danger of triggering street protests that are spontaneous in nature rather than politically driven, which maybe difficult to control through incarcerating select political leaders.

Copyright Business Recorder, 2024