ARTICLE: This is the second of a two-part series of articles on the consolidated federal and provincial budgetary operations data released by the Ministry of Finance for 2019-20.

Prime Minister Imran Khan has persistently expressed confidence in the performance of his economic team. The question is if his confidence is misplaced.

In a private meeting with a head of government Imran Khan reportedly acknowledged that he is not hands-on with respect to economic matters but then added that he does take regular (weekly) briefings on these matters. One may challenge this hands-off regular meeting approach given the penchant of the economic team leaders to engage in three questionable actions.

First and foremost is the penchant to manipulate data which disables the government's capacity to undertake a realistic analysis, leading to flawed decisions. The Zardari government reduced the weightage of food in the calculation of Consumer Price Index (CPI) to show a marked reduction in inflation. This was a more informed way of manipulating data relative to that employed by Shaukat Aziz in Musharraf's government and Ishaq Dar during PML-N regime who typically changed the final number without bothering to tally it with the components. The SBP in its third quarterly report indefensibly cited the July-March 2019-20 growth rate for services sector and large scale manufacturing as noted clearly in the Economic Survey 2019-20 as the rate for the entire year, an unrealistic projection especially given the onslaught of the pandemic in the last quarter of the year.

Secondly, policy decisions especially by the SBP were, in the past, backed by appropriate research; however during the past year SBP changed a critical policy matrix without providing any supporting research notably the decision to de-link the discount rate from core inflation (which takes account of only those items that respond to a change in the discount rate - an analysis backed by a research paper dated 2006) to Consumer Price Index (which does not) without presenting any supporting research paper till-date. In addition, the SBP clarified in February this year that "it is worth noting that the Real Effective Exchange Rate (REER) is simple, users often face difficulties in understanding its construction and interpretation.....neither can overvaluation or undervaluation be deduced from comparing the numbers to 100....the REER number merely shows a comparison relative to the 'chosen' base year...the extent of exchange rate under/over valuation is computed through a medium term analysis using sustainable norms for the current account balance, fiscal balance, demographic conditions etc." This clarification has been challenged by previous SBP governors who queried as to why then does the Bank continue to calculate the REER to which no response has been forthcoming so far. The SBP clarification then proceeded to dismiss these legitimate concerns by stating that "any casual remark could have deep negative repercussions which an economy like ours going through a stabilization phase cannot afford." Such warnings to the media are reminiscent of dictatorships.

Be that as it may, the REER as per the SBP website when compared to a 100 indicates an 'undervalued' rupee in June 2020 to the tune of nearly 7 rupees - the highest ever during the last two years. The SBP has not bothered to come up with its own assessment from 6 May 2019 to this day.

Thirdly, the capacity of our economic team leaders to understate a failure (low growth rate, high inflation and rising unemployment) and overstate a success (current account deficit reduction which is at the cost of lower domestic output reliant on imported raw materials) has been patently evident this year past; and the team's insistence on staying the course of the ongoing IMF programme with design flaws (mostly related to the timing of implementing the structural benchmarks and quantitative conditions) that are more and more noticeable with the passage of time should be a source of worry for the rest of the cabinet. Tax revenue on international trade remained more or less constant throughout the four quarters of last year, around 155 billion rupees and it is baffling as to how this was possible during the last quarter when the pandemic hit the country and trade (exports and imports) plummeted due to lockdowns across the globe. The July-March federal tax revenue collection as per the consolidated budgetary operations data was 3.27 trillion rupees while in July-June revenue was 4.33 trillion rupees. Sales tax collections (federal) were lower by around 100 billion rupees in the last quarter given the July-September collection of 403.9 billion rupees, 858.6 billion rupees for the half year, and 1.242 trillion rupees for the first three quarters of the year and 1.596 trillion rupees for the entire year (though lower by not more than 50 billion rupees). And petroleum levy for the entire year 2019-20 was not 260 billion rupees as noted in the budget documents for 2020-21 but 293.6 billion rupees - a 13 percent rise which made up the shortfall in sales tax by more than 50 percent but at the expense of the tax payers.

External inflows registered a rise of 76.6 billion rupees compared to what was noted in the revised estimates of last year in the budget documents with 2.99 trillion rupees budgeted for 2019-20, 2.181 trillion rupees in the revised estimates (budget documents) and 2.257 trillion rupees as documented in the consolidated budgeted accounts with the largest increase in programme support as expected - from 604 billion rupees during the first three quarters to 1.168 trillion rupees by the end of the year, a rise equivalent to the 1.2 trillion allocated for the Covid19 relief package, which is more than equivalent to the 1.4 billion dollar Rapid Financing Instrument disbursed by the IMF and over 600 million dollars pledged from the World Bank and the ADB. In this instance it is disturbing to note that other loans and one would assume this consists mainly of commercial bank borrowing from abroad, the most expensive short-term borrowing available, rose to 821 billion rupees from the budgeted 300 billion rupees with revised estimates of 623 billion rupees.

The 1.2 trillion rupees package was not fully utilized so noted government officials however the package did not consist entirely of disbursement given that: (i) 280 billion rupees was earmarked for wheat procurement which is not an expenditure item as once it is sold on the market the government recovers the amount, and (ii) tax concessions were extended.

Federal current expenditure was 6 trillion rupees last year as per the consolidated account against the budgeted amount of 7.292 trillion rupees and 7.6 trillion rupees in the revised estimates so under which item were the savings of around 1.6 trillion rupees? Not in domestic debt repayments, not in interest on foreign debt, not on pensions, not on defense, not on grants and transfers (which actually rose due to the Covid19 disbursement package), not on running of civilian government but perhaps from (i) utilizing the 115 billion rupees contingency (though the budget document does not indicate this was used in the revised estimates), and (ii) not taking account of foreign loan repayments of 1.2 trillion rupees as noted in the budget documents but not in the consolidated operations. Public Sector Development Programme it is acknowledged in the consolidated accounts was 467 billion rupees against the 701 billion rupees budgeted however the budget documents, against the usual practice, did not provide a revised estimate.

There is little doubt that the data contained in the summary of consolidated federal and provincial budgetary operations 2019-20 has raised several red flags not only for the staff of the International Monetary Fund team engaged with Pakistan on the ongoing Extended Fund Facility programme but also amongst local analysts. It is therefore critical for the Prime Minister to take a more hands on approach in economic matters and be guided by an independent team of experts.

Copyright Business Recorder, 2020