EDITORIAL: Arguably, there exist two serious flaws in the Pakistan's economy that are primarily responsible for the regular resort to the International Monetary Fund (IMF). At present, the country is in an IMF programme - Pakistan's 23rd since 1950. The following are these two profound fault lines or fractures in the country's economy:

First, the country's narrow tax base and its heavy dependence on imports for collection of revenue by way of customs duty, sales tax and income tax withholding to the tune of nearly 45 percent of its total revenue collection. Any change in the dollar-rupee parity or increase in international prices of imports results in a significant change in the revenue collection. Depreciation in value of the rupee increases the revenue while any reduction in value of imports decreases revenue collection. At the same time, rupee depreciation leads to increased debt servicing cost and an all-round increase in domestic cost of goods.

Second, the industrial policy was, and remains, focused on import substitution with very little or virtually no emphasis on local manufacture of intermediate or basic raw materials. The result is that the largest part of manufacturing industry is based on imported raw material except for textiles and that too, of late, has had to resort to import of cotton because of our neglect of research and development in this field. Therefore, when there is growth in the economy our imports go up and without a concomitant growth in our exports, that have remained static at best and declined at times, the country's balance of payment (BoP) becomes adverse and forex reserves come under increased pressure with the result that the country has no option but to borrow from foreign sources. The external debt reaches an unsustainable position where the country is compelled to seek IMF's assistance for balance of payment (BoP) support in the shape of a programme that also helps in obtaining the much-needed bilateral, commercial and multilateral loans to avoid default on our commitments. The IMF programme enforces stringent conditions for stabilization of the economy that stipulate rupee devaluation, increase in the discount rates, pass-through of all user charges on fuel and other utilities that burden the people. Once the economy has relatively stabilized, the country again goes into the growth mode without any major change in the model and we end up in another IMF programme. This has got to change. We have to focus on enhancing our exports. In fact, it is desirable that our GDP growth should be export-led and for that our export model has to change from exporting our surplus production to producing for export.

It is in this scenario that the finance minister, Shaukat Tarin, presented his first and the incumbent PTI government's third budget for the next fiscal year that declared that despite faced with numerous economic challenges and their aggravation by the Covid pandemic the government has successfully enabled the country to progress from stabilization to sustainable growth. The priorities stated include inclusive and sustainable growth, pro-poor initiatives and social safety net through vertical and horizontal expansion of the Ehsaas programme, a reduction in inflation, job creation through increased development spending (PSDP), support of the housing and construction industry, home remittance initiatives and investment by Pakistani diaspora and revenue mobilization without new taxes.

The guiding principles of the budget have been to streamline customs duties in a manner so as to remove anomalies from the cascading structure of tariff, promote and protect through interventions, enhance import substitution through rationalization of tariff on industrial raw materials and intermediate materials and promote export oriented manufacturing. The changes made in the customs tariff are projected to yield rupees 52 billion and the relief offered would have an impact of rupees 42 billion, resulting in a net increase of rupees 10 billion in duties. In sales tax, besides the additional revenue and relief measures, an attempt has been made to streamline and correct some drafting errors and enhance ease of doing business for registered persons. The revenue effect of changes in the sales tax and federal excise duty is projected at Rs196 billion as there would be a yield through revenue measures of rupees 215 billion while the relief granted would cost rupees 19 billion. Under the head of income tax new measures would yield rupees 116 billion and relief granted would cost rupee 58 billion, resulting in rupees 58 billion increased revenue for the exchequer. The total effect would be additional taxes of rupees 264 billion.

The size of the budget for fiscal 2021-22 is rupees 8.487 trillion with total tax revenue (FBR) target at rupees 5.829 trillion as against rupees 4.691 trillion estimated for the present fiscal year (2020-21). That represents a whopping increase of rupees 2.658 trillion. The finance minister expects to generate one trillion rupees through what he terms out of the box and innovative methods that include a gift scheme for sales tax paying consumers along similar lines as done in Turkey, South Korea and some other countries successfully and increase in use of information technology to identify tax evaders and delinquent payers. An important aspect of FBR revenue collection is the proposed use of third party to conduct audit of selected tax filers, not exceeding 4 percent of the total and withdrawal of audit function from the FBR to protect the taxpayers from harassment by the tax machinery. However, for the first time, wilful defaulters would face imprisonment in addition to monetary penalty. The tax revenue picture remains skewed with heavy reliance on indirect taxes that burden the poorer sections of society unfairly because of the element of withholding that is in vogue otherwise tax on consumption is a fair tax like tax on income.

Non-tax revenue is estimated at 2.08 trillion rupees as against the revised figure of 1.705 trillion rupees for the fiscal year. The main contributors to this head would be from auction for PTA 3G/4G licences that are projected to yield rupees 45.4 billion, mobile telephone hand set levy: rupees 29.5 billion; mark-up from provinces rupees 35.5 billion, from PSEs etc., rupees 90 billion gas infrastructure cess: rupees 130 billion, dividends: 90.3 billion, SBP profits 650 billion. Surprisingly, however, petroleum levy stand of rupees 610 billion, International oil prices are going north and are expected to remain high, in this scenario an increase in receipts under this head is quite doubtful.

On the expenditure side, there is an increase of 19.66 percent in total current expenditure from the revised estimate of the present fiscal of rupees 7,625,924 million to 9,124,459 million. The total expenditure of the federal government will rise from rupees 8,489,259 million to 10,262,309 million rupees. There are significant increases in mark-up on government borrowing, subsidies. The increase in pays and pensions and the raise in minimum wage are likely to exacerbate inflationary pressure.

The government has yet to reach an agreement with the Fund on the budgetary measures, although the expectation is that the Fund is likely to be accommodative due to the devastating third wave of the Covid pandemic. Circular debt and the electricity tariff, however, remain a sticking point where the government still has to get the Fund on board with its strategy. Overall, it is a budget that seeks offer relief to people in general and trade and industry in particular. There are, however, fiscal risks that exist and must be recognized. Although the government claims that it has put in place a strategic plan to reduce the power sector losses and circular debt, there are a couple of risks, according to the budget documents, like continued flow of power sector losses and non-payment of arrears and liabilities. If these are to be paid from the budget then it would adversely impact the government's fiscal position. Losses of Public Sector Enterprises (PSEs) are another area where the government provides financial help to them in the shape of guarantees, loans, equity investment, grants, etc. If the PSEs' losses continue to mount and the government is constrained to provide support to them from the budget that too will impact its fiscal position adversely. If the presumption in the budget of 'provincial surplus' does not materialize in any effective and meaningful manner that too will adversely impact the budget; and lastly, the unknown of the Covid pandemic going into 4th wave before we are able to vaccinate the majority of our adult population is a lurking risk to the budget as it would adversely impact the projected economic growth. Last but not least, on the face of it, the budget for fiscal year 2021-22 seems like a routine estimate of income and expenditure for one financial year, but there are hidden legitimate ambitions to brighten the incumbent government's prospects for the next general elections.

Copyright Business Recorder, 2021