There is a growing consensus amongst independent economists that the Khaqan Abbasi-led administration’s recent economic decisions, (inclusive of the budget 2018-19) would make the Caretakers’ task of running the country’s economy for two months – June, the last month of the current year, and July, the first month of next fiscal year – Herculean. The last month of any fiscal year is traditionally one of extreme stress for an incumbent government as it struggles to keep the deficit within sustainable levels – a struggle that implies: (i) raising revenue through taking some unsavoury measures, including collecting advance income tax, delaying refunds to exporters, and in some instances imposing a tax (Ishaq Dar raised sales tax by one percent across the board in June 2013 budget, and made it applicable from the day the budget was announced as opposed to 1 July). Perhaps for the first time in budget-making history of this country, the Minister of Finance assessed a raise in tax revenue of 13.4 percent for next year while the Federal Board of Revenue envisaged a net decline in tax revenue of 91 billion rupees due to massive tax incentives which the country simply cannot afford given the appalling state of the economy.
In this context, Ismail’s recent agreement with the textile sector that power rates will be reduced (implying higher subsidies) and outstanding refunds released (reducing revenue) would be difficult if not impossible to implement by the Caretakers. If he releases the refunds estimated at over 200 billion rupees by the exporters during his remaining tenure then the Caretakers would have to grapple with that much higher than envisaged deficit; and (ii) failure to control the rise in current expenditure which is met by reducing development expenditure with the capacity to fuel growth (the budget documents reveal that development budget was slashed by 250 billion rupees in the current year), and increasing reliance on domestic and foreign debt. From 2012-13 to 2018-19, current expenditure rose by 79 percent while interest on domestic and foreign debt as well as foreign loan repayment increased from 1.1 trillion rupees in 2012-13 to 2.2 trillion rupees in 2018-19 – a rise of 100 percent.
Two factors need to be highlighted in this context. First, the March 2018 International Monetary Fund (IMF) first post-programme monitoring report states that “external financing needs are expected to continue to mount in the medium term…which are expected to rise from 21.5 billion dollars in 2016-17 to around 45 billion dollars by 2022-23” while “mobilizing affordable external financing could become more challenging in the period ahead.” Pakistan’s foreign exchange reserves at present are less than what is required to meet three months of imports, considered the minimum required. And given that a 2.5 billion dollar debt repayment is due in June, as per Ismail while talking to Bloomberg in March, foreign reserves will decline further, putting greater pressure on the Caretakers to not only allow the rupee to depreciate further but also to enhance borrowing significantly. The attraction of going back on an IMF programme in June would be that sources of other multilateral budget support may open up, however, that would imply accepting extremely challenging conditionalities which the Caretakers do not have the mandate to accept – time bound conditionalities that would entail slashing current expenditure, and increasing revenue though one would hope that would be achieved through enhancing the tax network rather than raising taxes on existing taxpayers as has been the hallmark of the current government.
And, second, there are serious concerns that the Financial Action Task Force (FATF) scheduled to meet next month may place Pakistan on the black list for failing to implement their suggested laws (due to the tax amnesty scheme announced last month which specifies that money launderers are not to be allowed to use the scheme however no mechanism for determining the source of the money has been put in place).
To add to the woes of the people of this country, the water crisis has reached alarming proportions, a fact acknowledged in the water policy which received valuable input from Sartaj Aziz, the Deputy Chairman of the Planning Commission and which stipulated that 10 percent of federal public sector development programme (PSDP) must be set aside for the water sector and which must be raised to 20 percent by 2030. PML-N during its current tenure invested the least amount in this sector and only 3.7 percent of federal PSDP was allocated for this purpose in the current year. Meanwhile, farm output is expected to suffer due to severe water shortages for the Kharif crop in Sindh and in southern Punjab which, in turn will make further inroads into this government’s unrealistic growth target for next year.
The Finance Minister has shown little or no compunction in presenting outlandish data, not only because his government would not have to deal with any of the consequences but more disturbingly, according to political pundits, because the PML-N is increasingly realizing that it may not be allowed to form the next government. Thus the objective is to leave a shattered economy, refuse to acknowledge the true state of the economy and instead refer to 230 billion rupees being somehow raised by corporations/authorities (with more than a trillion in debt already) to fund 150 billion rupees of development budget including the 100 billion rupees earmarked for development expenditure by the next government.
