Finance Act 2020

01 Jul, 2020

EDITORIAL: The Finance Bill 2020 sailed through parliament and has effectively become an Act envisaging Federal Board of Revenue (FBR) target of 4.9 trillion rupees (against the 5.1 trillion rupee target projected in the International Monetary Fund staff report on Pakistan's request for Rapid Financing Instrument), petroleum levy has been projected at 450 billion rupees (against 489 billion rupees target set by the IMF) while non-tax revenue target was set at 1.1 trillion rupees (in synch with the Fund's projection of 1.1 trillion rupees target). The deviations between the budgeted projection and the IMF with respect to FBR and petroleum levy revenue collections are 200 billion rupees and 39 billion rupees, respectively, and one would assume that the government may have assured the Fund that the shortfall would be easily met with: (i) privatisation planned for 2020-21 though the Fund reckons privatisation would not be possible given the domestic and global investment climate post-Covid-19; and through reduced outlay on the loss-making public sector entities particularly Pakistan Steel Mills and Pakistan International Airlines. It is unlikely that the government's retrenchment plan for PSM approved by the Economic Coordination Committee of the Cabinet under the chairmanship of Dr Hafeez Sheikh, Advisor to the Prime Minister, will not be legally challenged or supported by the opposition.

Questions are being raised as to FBR's capacity to meet the target in a year where uncertainty continues to prevail with the pandemic not yet reaching its peak in the country, with government projections now claiming a peak early August, and where the budgeted projected growth rate is 2.1 percent though the Fund recently downgraded growth to 1 percent for 2020-21. With no new taxes and some relief to specific industries (including withdrawal of 25 percent excise duty on energy drinks, reducing federal excise duty on cement by 0.25 rupees per kg, exemption of income tax extended to Shaukat Khanum hospitals, SIUT National Endowment Scholarships for Talent, and sales tax exemptions to a number of industries) the government's projection of a raise in FBR revenue from 3.9 trillion rupees in the revised estimates to 4.9 trillion rupees in the current year (about 26 percent rise) appears to be an over-optimistic target that may require additional taxes in the coming months. The Fund would no doubt agree to a revised target only if the current rampage by the coronavirus on the state of the economy does not abate.

The petroleum levy at 30 rupees per litre, the highest possible without the government raising the limit which would require parliamentary approval, has already been criticized by the general public; and with growth estimated at negative 0.4 percent for the outgoing year followed by rising unemployment and salary freeze in both the public and private sector for 2020-21 the capacity of the public to afford transport is likely to be severely compromised with consequences on the growth rate.

The State Bank of Pakistan projected profit for next year of 620 billion rupees may also not be assured if 7 percent discount rate, reflecting the lower rate of inflation as well as considerable political pressure, and the ongoing pandemic continues and the capital loss that SBP would incur on SWAP funds and placements by foreign depositors whenever the PKR value depreciates.

The general consensus is that the budget 2020-21 adheres to the IMF template and any significant deviation may well lead to suspension of the 6 billion dollar Extended Fund Facility programme. Without being on the Fund programme, other multilaterals as well as bilaterals may withdraw their budget support, though project assistance may continue, that raises the possibility of default and higher, not lower, taxes. Ironically, for next year the budget envisages higher reliance on commercial banks to the tune of 647 billion rupees (at a higher interest rate and small amortization period) relative to the Fund's injection of 211 billion rupees, debt equity through issuance of sukuk/Eurobonds of 247.5 billion rupees (which would have to offer higher rates without IMF programme) and Saudi oil deferred payment of 165 billion rupees.

Total foreign loans and repayment for 2020-21 are budgeted at 1.228 trillion rupees and repayment of short-term credit at 183.6 billion rupees (will vary if the rupee value continues to depreciate) or a total of 1.4 trillion rupees which is slightly lower than the sum of non-tax revenue plus petroleum levy of 1.6 trillion rupees. The amount for domestic debt servicing, however, is disturbingly high at 2.63 trillion rupees and it is the ruling Pakistan Tehrik-i-Insaaf government that can be held responsible for the highest ever raise in total domestic debt - from 3.2 trillion rupees in 2008 to 9.2 trillion rupees by 2013 to 16.4 trillion rupees by 2018 and by April 2020 to 23.5 trillion rupees (with reliance on Pakistan Investment Bonds the highest which is linked to the discount rate with the bulk issued when the rate was as high as 13.25 percent) and needless to add data for the remaining three months of the outgoing year would raise this figure a lot higher.

Copyright Business Recorder, 2020

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