A few days before Shaukat Tarin was appointed as the fourth Finance Minister in Imran Khan’s government, he had
blasted the handling of the economy and said it was directionless and mismanaged. Within weeks of being appointed the Finance Minister, the economy miraculously turned around, clocking a growth rate of 3.9 percent. It wasn’t questioned that there was some revival in the economy that had all but collapsed since Imran Khan was ‘selected’ Prime Minister. But the growth rate of close to 4 percent wasn’t very convincing. Some of it could be explained by the
‘low-base effect’. But the fact that this growth number flew in the face of the estimates by the International Monetary Fund (IMF), World Bank, and even the State Bank of Pakistan (SBP) has raised quite a few eyebrows. Some
number crunching by the former Finance Minister and the doyen of economists in Pakistan, Hafiz Pasha, suggests old fashioned figure fudging to present a rosy picture of the economy, something that defuses some of the political pressure on the Imran Khan government and also helps it to negotiate softer terms with the IMF.
Heroic assumptions
It was against this backdrop that the
budget for FY2021-22 was presented. As usual, the budget is full of heroic assumptions, some of which are quite audacious. The
Annual Plan for the next fiscal is targeting a real growth rate of 4.8 percent and inflation at 8 percent. The drumbeaters of the regime are, of course, singing paeans for the budget using familiar tropes—balanced, growth-oriented, pro-poor, etc. But skepticism abounds over the feasibility of these targets, simply because the revenue numbers are very dodgy, which raises serious questions about the fiscal calculations contained in the annual financial statement of Pakistan. Add to this the fact that the structural problems that afflict Pakistan’s finances have only deepened and it is clear that both the budget and the economy are hinged on a wing and a prayer.
The drumbeaters of the regime are, of course, singing paeans for the budget using familiar tropes—balanced, growth-oriented, pro-poor, etc. But skepticism abounds over the feasibility of these targets, simply because the revenue numbers are very dodgy, which raises serious questions about the fiscal calculations contained in the annual financial statement of Pakistan
Unrealistic tax target
The
budget 2021-22 expects to collect PKR 5.83 trillion in taxes. This is 24 percent more than the estimated PKR 4.69 trillion that Pakistan hopes to collect in the outgoing fiscal. According to the
Finance Minister, with the economy growing by 4.8 percent and with inflation being around 8 percent, then there will be a natural growth of around 13 percent or PKR 550 billion in tax revenues. The question is where the rest of the 11 percent tax revenue will come from. Tarin is confident that he will be able to collect around PKR 500 billion through fresh taxation of around PKR 260 billion, and administrative and enforcement measures that will help in mopping up another PKR 240 billion. Clearly, this business of tightening the tax machinery is one of those promises that is made virtually every year but is never really lived up to. Normally, it serves as a convenient ploy to cover up and explain how a gaping hole in finances will be filled. This time, however, there are some plans—imprisoning retailers who sell smuggled goods, increasing point of sales machines etc.—which it is hoped will help in meeting the revenue target.
Tarin is confident that he will be able to collect around PKR 500 billion through fresh taxation of around PKR 260 billion, and administrative and enforcement measures that will help in mopping up another PKR 240 billion. Clearly, this business of tightening the tax machinery is one of those promises that is made virtually every year but is never really lived up to
The petroleum problem
The problem is that even if this very ambitious tax revenue is mopped up, it still leaves a gaping hole in the federal government’s finances. After transfer to provinces, the net revenue available with the federal government is PKR 4.5 trillion. This includes non-tax revenue, the bulk of which comes from SBP profits of PKR 650 billion, petroleum levy of PKR 610 billion (up from PKR 500 billion last fiscal), and gas infrastructure development cess (GIDC) of PKR 130 billion (up almost 10 times from the outgoing year). Both the petroleum levy and GIDC will lead to a big hike in gas and petroleum prices. If international prices stay at around US $70 per barrel of oil (bbl), petroleum prices will have to be hiked by anything between PKR 25-30 per litre. Here, again, the Finance Minister is on a wing and a prayer. He is banking on the Saudis giving a deferred payment oil facility, which will help postpone payday for the oil and prevent a hike in domestic prices. He is also hoping that oil prices will ease and the levy can be built into the current price structure. But if either of these don’t happen, then prices will have to be hiked or the government will have to reconcile to forgo this revenue, which will burn a hole in its finances. If prices are hiked, then it will not only have an inflationary impact but will also put additional pressure on the already broken energy economics of Pakistan by leading to a hike in power generation costs—almost 60 percent of power is generated from oil, gas, and other thermal sources. Higher generation costs will either result in higher power tariffs or higher subsidies, without which the circular debt will increase, something that is unacceptable for the IMF. Already the subsidy bill has ballooned to PKR 680 billion, a bulk of which is for power subsidy because the Imran regime is reluctant to raise power tariffs to plug the out-of-control circular debt which has touched PKR 2.1 trillion.
If prices are hiked, then it will not only have an inflationary impact but will also put additional pressure on the already broken energy economics of Pakistan by leading to a hike in power generation costs—almost 60 percent of power is generated from oil, gas, and other thermal sources. Higher generation costs will either result in higher power tariffs or higher subsidies, without which the circular debt will increase, something that is unacceptable for the IMF
Debt, defence, and doles
Assuming that the petroleum levy and GIDC work according to plan, and the federal government is able to get the entire budgeted net revenue of PKR 4.5 trillion, it still doesn’t solve the problem. Almost the entire net revenue is accounted for by debt servicing PKR 3.1 trillion and defence expenditure of PKR 1.37 trillion. Everything else is paid out of debt. But wait, it gets worse. Pensions of PKR 480 billion now cost more than the entire cost incurred on running of the civil government, which is PKR 479 billion. A strange entry in the budget is ‘Pay and Pension’ costing the government an additional PKR 160 billion. Considering that the pension account includes both defence pensions (PKR 360 billion) and civil pensions (PKR 120 billion) and pays of government staff and officers are included under the head of civil government, it isn’t clear what this ‘Pay and Pensions’ account caters to. Some people suspect that this is a sort of suspense account that will eventually be used for the defence budget. Others believe that this is catering for the hike in pays that have been announced in the budget. But surely that hike would have already been included in the civil government head. Be that as it may, there is a bit of suspense around this particular item in the budget.
Dodgy calculations
While the net revenue receipts of the federal government are PKR 4.49 trillion, the total expenditure is PKR 8.49 trillion, including a federal public sector development programme (PSDP) of PKR 900 billion, leaving a deficit of almost PKR 4 trillion. According to the budget documents, the total resources available to the federal government, apart from the net revenue receipts, include privatisation proceeds of about PKR 250 billion, surplus of provinces of an astounding PKR 570 billion, net external financing of PKR 1.25 trillion, and domestic borrowing of PKR 2.5 trillion. The problem is that,
firstly, within a day of the budget being presented, a proposal to tax internet usage and mobile phone calls amounting to PKR 100 billion has been withdrawn.
Second, privatisation was budgeted to yield PKR 100 billion last year. According to revised estimates, the amount received under this head was zilch, zero, zip. Expecting PKR 250 billion in FY21-22 is a pipedream. Worse, even if some of the government enterprises are privatised, it will be nothing more than an accounting adjustment—the companies will be handed over to a government holding company. Therefore, chances are that this amount will be a pie in the sky.
Third, the provincial surpluses are extremely unlikely. In the outgoing fiscal, the government had budgeted for PKR 242 billion. The budget FY21-22 documents have surprisingly given no number on the actual amount of surplus generated by the provinces. Perhaps, this was another sleight of hand by the Finance Minister to hide the actual situation. But truth always outs. The budget documents for FY21-22 of
Punjab reveal that out of a budgeted PKR 125 billion surplus that Punjab was supposed to generate, it managed only PKR 40 billion. The
Sindh budget reveals that, last year, Sindh ran a deficit of PKR 18 billion which is almost what it had budgeted for. Clearly, this means that the expected PKR 242 billion last year has fallen woefully short of target. This year, the provinces are expected to generate a surplus of PKR 570 billion, more than double of last year’s target. But Punjab has budgeted for only PKR 125 billion while Sindh had once again budgeted for a deficit of almost PKR 26 billion.
The other two provinces—Khyber Pakhtunkhwa and Balochistan—account for less than 25 percent of the economy so even if they generate a surplus, it will not be enough to meet the targets of either last year, or the coming fiscal. In other words, chances are that out of the budgeted PKR 570 billion provinces surplus, the actual surplus will be short by anything between PKR 400-500 billion. There is absolutely no explanation of how this shortfall will be plugged. The bottom line is that just these three heads add a hole of at least PKR 800 billion to the finances of the federation. What is more, if the tax revenue falls short of target, then so too will the transfers to provinces, which in turn means that the chances of surpluses go down drastically. Even otherwise, forcing provinces to generate surpluses violates the federal structure and the Finance Commission awards because, technically, it means that, while on paper the federal government is transferring PKR 3.4 trillion to provinces, in reality it will only be transferring about PKR 2.9 trillion (after deducting the surpluses it is expected), which is almost the same amount that was transferred last fiscal.
Dependence on debt
The federal government has provisioned for a gross external receipt of PKR 2.75 trillion. This includes loans of PKR 2.7 trillion and grants of PKR 0.32 trillion and project loans and grants outside PSDP of PKR 0.23 trillion. Out of this gross amount, PKR 1.5 trillion will go in repaying foreign loans and PKR 0.74 trillion in repaying foreign credits, leaving net foreign receipts of PKR 1.25 trillion. Out of the total external loans being taken, about PKR 800 billion (about US $5 billion) will be taken from commercial banks. Another PKR 496 billion (about US $3.1 billion) will be taken for budgetary support from IMF. Other loans from the World Bank and Asian Development Bank (ADB) (approx. US $2-3 billion) will be contingent on the IMF programme staying on the rails. In other words, without the IMF on board, the budget is unsustainable. But Finance Minister Tarin has been playing the game of chicken with IMF. One of his predecessors, Asad Umar, had also tried to play hard ball, but had failed. He had to be sacked and Hafeez Shaikh brought in to placate and sign the deal with the IMF in 2019. Now, Tarin is playing the same game—defying the IMF on issues of power tariffs, income tax collections, and other conditions imposed by the IMF.
Without the IMF on board, the budget is unsustainable. But Finance Minister Tarin has been playing the game of chicken with IMF. One of his predecessors, Asad Umar, had also tried to play hard ball, but had failed. He had to be sacked and Hafeez Shaikh brought in to placate and sign the deal with the IMF in 2019
Afghanistan and America
As is their wont, the Pakistanis have tried to string the IMF along. They agreed to benchmarks when Shaikh was Finance Minister so that the IMF review sailed through and the IMF programme was restored after the disruption caused by the pandemic in 2020. As soon as the programme was back on the rails, Shaikh was sacked and Tarin brought in. Immediately, he made noises suggesting that the IMF programme had to be tweaked according to Pakistan’s wishes. So far, the IMF has dug in its heels. Tarin has made the budget sticking to some of the targets set by IMF but not followed the IMF on how these targets are to be met. For its part, the IMF has become wise to Pakistan’s wiles and is not budging. What Tarin is banking upon is that a combination of hard-ball negotiations and brinkmanship coupled with some strategic compromises—it is hoped Afghanistan will again come to Pakistan’s rescue—will make the Americans lean on the IMF to give in to Pakistan. But this is a high-risk strategy: If it doesn’t work, the budget is a worthless piece of paper, better used for hurling at each other in Pakistan’s national assembly; if it works, and the US asks IMF to cut some slack for Pakistan, the economy will be able to breathe easier for an year, maybe two. But after that, the structural problems will once again take it back into the ICU.
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