Dar's selective delight

With one eye on his budget speech and the other on the next elections, Mr Dar was in a giving mood yesterday. Never one to shy away from self-praise, the finance czar devoted first half of the speech on the improving macros under his watch, and how just in three years, the economy was pulled from the abyss. While no one can deny the gains the economy has made in recent years, there are few who credit government strategy.
Instead, exogenous factors are attributed by experts for the recovery. Moreover, some of the gloss is owing to creative accounting. The first such instance occurred when right after the PML-N government assumed power, a bulky circular debt payment was made that bloated the fiscal deficit of previous government's last year in power, that is, FY13. That's how fiscal deficit declined from 8.3 percent in FY13 to 4.3 percent in FY16.
On the revenue mobilization front, there is a 60 percent cumulative increase in taxation in the last three years. Admirable, but that is primarily due to an obsession with WHTs, other indirect taxes, and direct taxes in indirect form, super tax, and higher GST on petroleum products. This is farthest from the stated goal of broadening of the tax base.
On the external front, the pile of SBP foreign reserves has also grown from the trough of $2.8 billion in February 2014 to a high of $16.8 billion. But sustainability of that mountain is questionable, given that most of the additional reserves have accumulated due to the windfall from low oil imports, IMF tranches, gifts from heavenly friends, selling of bluechip companies' shares, and expensive borrowing from international debt market.
Anyways, the forex reserves are all at all-time high, but there are more reasons for Dar to smile. He also jubilated on the per capita income (PCI) increase of 17 percent in dollar terms in last three years; but he was silent on a mere 3 percent increase in PCI FY16. Had the rupee-dollar parity not been artificially maintained, the PCI could have fallen in the outgoing year.
Then there is the 40 percent cumulative growth in machinery imports that is shown as an indicator of an increase in investments. But there was no mention of the fact that the investment to GDP ratio declined from 15.5 to 1.52 percent in the last year. The careful selection of indicators and forceful articulation in a bid pose a rosier picture is the highlight of the speech. Well, Dar is now proving that he is not only the master of creative accounting but perhaps also of creative presentation. The decline of policy rate from 9.5 percent to four decades low of 5.75 percent is portrayed as a big success. However, latest decline of 25 bps at the time of rising inflationary trends is deemed as an imprudent populous decision.
Official data portrays the poverty incidence and unemployment rate on a decline. However, there are serious doubts on the computation of both indicators and folks in policy think tanks don't take either of the recorded numbers seriously. Nonetheless, higher spending on BISP is commendable and enhancing its base from 3.7 million households to 5.3 million in last three is a job well done.
Looking towards the future, the medium-term economic framework of FY16-19 has set ambitious targets given the unsustainable policies. If wishes were horses, beggars would ride. Anyway, best of luck in achieving 7 percent GDP growth, investment to GDP of 21 percent, a thinned fiscal deficit 3.5 percent, tax to GDP ratio of 14.5 percent, and foreign exchange reserves to $30 billion by FY19.
Last year's budget had hinted on moving from stabilization to growth; and this year the intentions are to go for pro-growth policies with full throttle. The IMF programme is at its tail end and elections are not that far; so the government means business now. The textile players must be jumping in air as they have gotten the kind of relief measures which even they didn't ask for. Dar is dreaming that pro-export policies will flood the country with dollars; and that even adjusting for hefty foreign debt servicing in the coming two years, the foreign reserves will keep on piling.
Among a slew of measures, the long-term financing rates have been further reduced to 3 percent for exporters and export refinance rates have been lowered too. Dar has promised to clear all pending tax refunds of exporters in a few months' time. The existing scheme of drawbacks of local taxes will also be extended. All the five traditional exporting sectors have been reverted back to their much demanded zero rating. For SMEs, a technology up-gradation fund will be established. In a nutshell, there are umpteen measures that have been announced when exports are at multi-decades low in terms of percentage of GDP.
To the surprise of many, the urbanized PMLN government is seemingly keen to address the woes of farmers. As per Dar's acknowledgement, the agriculture sector has just had one of the worst years in the history of Pakistan; and the budget FY17 has responded with an array of relief measures. The package ranges from direct cash support to a 10- 20 percent decline in fertiliser prices, lower pesticides prices, subsidy on banks credit, credit guarantee schemes and lower electricity rates on tube wells.
Finally, the government is thinking beyond so-called support price to actually support farmers. The subsidy element of around Rs 73 billion is supposed to be shared between federation and provinces. If that becomes difficult, it may make the fiscal deficit target of 3.8 percent stiff.
For the industrial sector, there are tax credits provided for industrial sector ranging from generating employment to BMR and new projects. There are reductions in custom duties on raw material and machinery and so on and so forth. However, the proposal for advance taxes to be paid on the basis of alternate corporate tax, from existing method of tax collected on income tax and minimum tax on turnover, will somehow nullify the impact of majority of new tax credits. Well, that is termed as creative accounting.
The minimum tax is also rationalized which would increase the toll on taxes for companies making gross losses. The rest of tax measures are on the non-filers. Dar continues further on his policy of necking down the non-filers by not only expanding the net of WHT but also by increasing the rate of items where WHT is applicable on non-filers. There was no mention on WHT tax on banking transaction; but it may revert to 0.6 percent implicitly by the start of next fiscal year.
In a nutshell, the budget is to support the ailing export and farming sectors while the tax collection's ambitious targets ought to be met by having more and more taxes in indirect form. Already the indirect taxes including direct taxes in indirect form are over 80 percent of FBR's tax collection. Any further increase in it will make the taxation more regressive. And how come a regressive tax approach can be pro-growth and anti-poor?
The documentation of the economy is already on the decline due to skewed WHT policies as 80 percent of broad money increment this year so far is going out of the system. Dar was silent in his speech on this grave issue and continues with policies which have exacerbated the situation. How can the tax to GDP ratio increase to 14.5 percent of GDP in three years in an economy where documentation is on decline?