Fiscal deficit and IMF

Reports indicate that the International Monetary Fund (IMF) staff mission, during the ongoing second review of the 6 billion dollar 39-month front-loaded programme, has expressed concerns at the projected fiscal deficit as a consequence of the estimated 387 billion rupee revenue shortfall this year. Advisor to the Prime Minister on Finance Dr Hafeez Sheikh is on record as having stated repeatedly that the revenue shortfall would be met through higher than budgeted State Bank of Pakistan (SBP) profits (a claim made in the first quarter data released by the Ministry) and fast tracking the privatisation process. The January 2020 SBP monetary policy announcement that envisages another 200 billion rupee concessional credit (at 5 to 6 percent) to exporters - 100 billion rupees under long-term finance facility and 100 billion rupees under export refinance scheme will certainly add to SBP's profits. Analysts point out that the Privatisation Ordinance 2000 limits utilisation of the proceeds to (a) 10 percent to be used for poverty alleviation programmes; and (b) the remaining 90 percent for retirement of the Federal Government debt; however given that Pakistani governments, incumbent and its predecessors, have consistently violated the Fiscal Responsibility and Debt Limitation Act 2005 envisaging limiting the government debt to 60 percent of GDP, the Privatisation Ordinance is unlikely to deter the Finance Ministry from meeting its revenue shortfall from privatisation proceeds especially as money is fungible.

In the event that fast tracking privatisation to meet the revenue shortfall does not hit any snags, including adhering to the complicated process before privatisation can proceed, and one would have to include legal as well as staff resistance to such a move, reports indicate that the IMF mission has raised the issue that privatisation entails a one-off resource and that tax reforms remain pending. The focus of the administration so far has been on enhancing documentation, with most of those not required to file, for example, widows, pensioners and students, opting to file as that would enable them to purchase goods and services at the reduced withholding tax rates. The other major source envisaged by the Prime Minister, notably bringing back the wealth illegally procured and stashed abroad, remains a pipedream to date. Recent reports also suggest that the government may be considering selling 27 real estate properties through an open auction with a minimum reserve price - this again is a one-off revenue source. The focus must be on reforming the tax structure to make it fair (greater reliance on direct taxes which are a tax on income and not through withholding taxes on delivery of services and goods), equitable and non-anomalous.

In our view, two elements of the IMF programme agreed by the government's economic team should be a source of serious concern to the Khan administration and perhaps, by extension, to the Fund. Firstly, the 5.5 trillion rupee Federal Board of Revenue (FBR) target envisaging a growth of 34 percent in revenue in a year where growth was projected at 2.4 percent (in the IMF documents as well as the budget pre-approved as part of the up-front conditions) was simply too challenging to be achieved. Given that actual FBR collections were a lot lower in 2018-19 than what was projected at the time of the budget - 3,824 billion rupees instead of 4,150 billion rupees - the target was even more ridiculous as it envisaged a rise of 45 percent. To blame Shabbar Zaidi or his team for failure to meet the unrealistic challenge is therefore simply unmerited and the fault, if any, must lie with government's economic team. Additionally, the massive import contraction due to contractionary policies of the State Bank of Pakistan, again prior IMF conditions, further reduced revenue collection from import levies, a fact that our team was aware of and should have been factored in at the time of finalizing the tax collection target.

Secondly, the IMF agreed to a budget deficit of 7.2 percent, the same as was projected for 2018-19 though the actual achieved was 8.9 percent, or in other words, the IMF agreed to a current expenditure budgeted to rise by 33 percent and development by 40 percent. To argue that this can be attributed to the commitment of the government to social sector protection and Ehsaas programme, the Prime Minister's signature programme, requires a fact-check: out of the 190 billion rupees earmarked for Ehsaas, under current expenditure's sub-heading transfer and grants, 120 billion rupees has been earmarked for Benazir Income Support Programme referred to as Kafaalat (as opposed to 124 billion rupees budgeted for last year with 118 billion rupees disbursed) leaving only 70 billion rupees for the health cards and other schemes under the Ehsaas.

In essence, the IMF conditions to bring the untaxed wealthy sectors into the tax net and to achieve full cost recovery with respect to the utility sectors, particularly power, remain pending with the Khan administration doing what previous administrations did: increasing revenue through raising taxes through a mini-budget and/or privatisation and raising utility rates. This needs to change with the onus to do so firmly on the cabinet.