Mid-year budget review - 2019-20

The Federal Ministry of Finance has formulated the mid-year budget review 2019-20. Subject to its review by the Federal Cabinet and the National Assembly the report would be rolled out soon. One important aspect of the report is the fiscal risk analysis and identification of the key fiscal risks threatening the economy and the fiscal health of the country.

The following are the key fiscal risks: (i) substantial shortfall in tax revenue; (ii) unexpected volatility in exchange rate: (iii) losses and circular debt in energy sector; (iv) increase in pension expenditure and liabilities; and (v) unexpected public debt and financing of fiscal deficit.

Of the above five, substantial fall in tax revenue and losses and circular debt in the energy sector are for real and the fate of these two put together will determine the make or break of country's economy and its fiscal health. It would not be out of place to add to it the mounting losses being incurred by other Public Sector Enterprises (PSEs).

The incumbent government has done well in restructuring the tax revenue regime and bringing the non-tax filers into the tax net through carrot and stick methodology. The number of tax filers has reached around 2.7 million and an increase of almost 40 percent in the first half has been witnessed. But this is more of numbers, largely comprising middle income group segments, rather than volume as potential taxpayers who generate the volume - professional practitioners, service industry, real estate segment, traders and those thriving in grey businesses where the mode of business transactions is traditionally in cash - continue to remain out of the tax net.

The Federal Board of Revenue (FBR) has provisionally collected Rs 2,412 billion during July-January (2019-20) against the downward revised target of Rs 2,622 billion, reflecting a shortfall of Rs 210 billion.

However, considering the sluggish economic growth this is quite an achievement when compared to Rs 2,067 billion during the corresponding period of 2018-2019, reflecting an increase of 16.7 percent.

It is unlikely that FBR would be able to make good this shortfall in the next half of 2019-20. The gap is likely to widen further and we may end up at Rs 4,800 billion by fiscal year end on 30 June 2020, as foreseen by a number of economists.

The biggest challenge to revenue generation is the sluggish money transactions in the market, absence of real estate and its allied industry from the mainstream economy, stagnating industrial growth and exports. This leaves FBR with only a few growth channels to capitalize upon.

Under these restraints, the best bet for FBR is to strengthen its ranks and technology and successfully persuade tax evaders specially the high net-worth ones to start paying taxes.

The other venue available to the government to increase its revenue is to block the flow of good money into loss-making PSEs and the energy sector - both of which are woefully riddled with mismanagement and poor governance.

After two years in power, not only has the government failed to roll out the Sarmaya Company, it has also remained unsuccessful in restructuring or privatising loss-making PSEs.

This is one option which is available to the government to exercise which could yield multiple and remarkable results in terms of plugging the flow of good money for a hopeless cause, fill in government coffers with proceeds from privatisation of sick PSEs, and revenue generation by restructuring the viable PSEs.

This is however a major challenge for the government with multiple consequences in terms of labour unrest and political consequences. The last PML-N government shied away from its ongoing privatisation plan as it could not sustain the political pressure.

The other option left to the incumbent government is to curtail its development plans which could turn out to be even more damaging in view of a number of ambitious social programmes launched by the government. These programmes have raised legitimate public expectations.

(The writer is former President of Overseas Investors Chamber of Commerce and Industry)