EDITORIAL: The Federal Minister for Finance, Muhammad Aurangzeb, while addressing the Karachi Chamber of Commerce and Industry stated that efforts were under way to first attain macroeconomic stability and then take growth-oriented steps for otherwise the prevailing structural issues facing the country’s economy would lead to balance of payments issues, as has been evident in such cycles in previous years that forced the country to go on twenty-four International Monetary Fund (IMF) programmes.
This approach is reflected in the July Economic Update and Outlook released by the Finance Division, which neither provides data for credit to the private sector, as the government has been engaged heavily in deficit financing as noted in the Monetary Policy Statement dated 29 July, thereby crowding out private sector activity, nor itemized the releases under Public Sector Development Programme which has spearheaded growth in this country in previous years.
However, the same day the Finance Minister urged banks to lend more to the IT sector, farm sector and small and medium enterprises – an exhortation that one hopes would imply the government would reduce its own domestic borrowing though the budget 2024-25 envisages additional domestic bank borrowing of 5.1 trillion rupees against 2.86 trillion rupees last year – a whopping 78 percent increase.
The question however is what concrete steps have been taken to achieve macroeconomic stability? The visible signs of such steps are the staff-level agreement reached with the International Monetary Fund (IMF) on 12 July, after prior conditions were met, inclusive of the passage of the finance bill by the National Assembly as well as the enhancement of utility rates and petroleum levy, and the subsequent official visits of the Finance Minister and Power Minister to secure 12 billion dollar rollovers for the programme duration (37 months) as well as to re-profile debt of the power sector that the government has been unable to clear due to paucity of foreign exchange reserves.
The prior conditions are of course fuelling public discontent though the Finance Minister is focused on easing concerns of the productive sectors defined as the elite as their capacity to influence policy is well documented.
Aurangzeb is hopeful that the increase in the income tax rates as well as the widening of the tax net to include small traders will go smoothly; however, these measures are under process and their acceptability by the general public will be evident starting this month (August).
He has budgeted an extremely optimistic rise in Federal Board of Revenue (FBR) collections of 40 percent in the current year, 12.97 trillion rupees against 9.252 trillion rupees achieved last year, with 36 percent rise in sales tax collections (a highly inflationary tax), and 31 percent rise in petroleum levy collections – indirect tax sources that would hit the common man much harder than the rich.
The budgeted rise in direct taxes is 48 percent though around 75 percent of this is withholding tax on transactions in the indirect sales tax mode. In other words, the fiscal policy for the current year is heavily contractionary and therefore not growth-oriented which begs the question of how the growth rate of between 2.5 to 3.5 percent was determined.
This is not to undermine the minister’s intent to first achieve stability and then to proceed towards growth-oriented policies but to emphasise that to achieve his objectives requires a sea change in thinking, which has so far not been evident in his maiden budget.
Given the current state of the economy, an out of box thinking necessitated slashing government current expenditure to minimise the need for borrowing from external and domestic sources and not to seek additional sources from an already heavily taxed public reeling under a rupee erosion that has already compelled many a household to defer all expenses other than their kitchen budgets.
Poverty levels are at a high of 41 percent and hence the sacrifice has to be by the major recipients of the budget. In addition, reforms in the appallingly run power sector must begin with abandoning the policy of tariff equalization subsidies that cost the taxpayers over half a trillion rupees in the current year’s budget alone.
There is a need to tax the untaxed (rich farmers, traders, etc.), as correctly stated by the minister as well as by his predecessors, but at the current juncture that our economy is clearly at, there is a need to increase leverage with the lenders through reducing instead of increasing all items under current expenditure (with the exception of the allocation for Benazir Income Support Programme), which would get the people of Pakistan behind the reforms and defuse all public protests, be they spontaneous or organised, which, in turn, will clear the path towards achieving stability and growth.
Copyright Business Recorder, 2024