Prime Minister Imran Khan while chairing the Dr Hafeez Sheikh-led think tank directed that a cell be established to review the subsidy system with the objective of improving it and added that the benefits accruing from the Ehsaas programme must also be taken on board when providing subsidy to the poor and vulnerable on gas and electricity tariffs and on products on sale in the outlets of Utility Stores Corporation. The sum total of the budgeted allocations for subsidies for the current year is 209 billion rupees, with the largest component being subsidy to Wapda/Pepco of 124 billion rupees and K Electric of 25.5 billion rupees, while Ehsaas programme is earmarked 206 billion rupees with 200 billion rupees earmarked for Benazir Income Support Programme.
The budget for the current year envisages a significant decline in subsidies - from 349.5 billion rupees in the revised estimates of last year to 209 billion rupees in the current year, a decline of 40 percent - as well as a decline in BISP from last year’s revised estimates of 234.2 billion rupees (raised in the aftermath of the Covid-19 onslaught) to 200 billion rupees this year, a decline of 15 percent. In other words, an attempt has been made to not only reduce these two expenditure items with direct implications on an administration’s popularity but more importantly to target the beneficiaries which must be appreciated. However, the total budgeted amount for these two expenditure items is 415 billion rupees which is around 6 percent of the total budgeted federal expenditure of 7.136 trillion rupees and with a projected 3.4 trillion rupee federal deficit massive external and domestic borrowing would be required to meet the shortfall – a shortfall that would rise from what is budgeted in the event that the government is unable to meet its budgeted revenue (tax and non-tax). Thus the possibility of a suspension of the International Monetary Fund (IMF) programme is untenable with the budget 2020-21 in spite of the senior Ministry of Finance officials’ claims made last week in an interaction with select beat reporters that the economic team was focused on formulating the budget and its passage through parliament as well as dealing with the pandemic and that the IMF’s stated position to return to the programme signed by the government on 12 May 2019 as soon as the pandemic has been dealt with is not yet under consideration.
The second tranche release under the IMF programme remains pending though on 27 February 2020 the Fund announced a staff level agreement was reached; however, the consensus was that it was to be tabled before the Board of Directors pending the implementation of prior conditions by Pakistan, a pledge which was understandably abandoned as a consequence of Covid-19. There has been no talk since of a successful completion of the second mandatory review with analysts arguing that the Fund is insisting on agreed conditions which were largely unrealistic and led to dismissal of some key officials, notably Younus Dagha, when he pointed this out, by the then newly appointed adviser to prime minister on finance and revenue Dr Hafeez Sheikh.
Be that as it may, the delay in the release of the second tranche is indicative of a widening disconnect between the IMF’s stated position (to adhere to the agreed conditions) and the government’s position with respect to the implementation of the agreed time-bound structural benchmarks and quantitative targets. The question why or for what reason maybe sourced to the widely different perceptions of the efficacy of the pro-growth policies that have been recently announced by the Prime Minister. Incentives to the construction industry maybe a challenge at best, as they include: (i) an amnesty from providing source of income to those who invest in the sector till the end of this calendar year, while what would be clearly a deterrent are reports sourced to FBR that it would require builders and developers to register with the FBR till December 31 this year, (ii) lower excise duty on cement while the actual market rate has risen due to speculative buying, and (iii) subsidized credit to purchasers of the constructed houses, 5 percent, though without collateral it is unlikely that the banks would be in any hurry to approve loans.
It is worth noting that while IMF’s growth projection for the country is one percent for this year yet the budget document forecasts 2.1 percent. Inflation projected at 11 to 12 percent in the current year no doubt reflects not only supply side factors, sourced to cartelization/artificial shortages, but to massive borrowing by the federal government (total public debt gross is budgeted at 87 percent of GDP this year compared to 86.8 percent in the outgoing year) which would also negatively impact on private sector borrowing with a consequent impact on growth. The FBR revenue, projected to rise to 4.9 trillion rupees, a function of the growth rate, from the 3.9 trillion rupees as per the revised estimates of the current year, appears to be wishful thinking. To meet these targets requires a ‘mini-budget’, raising tariffs as there appears to be no improvement in power sector performance and last but not least a reduction in expenditure from items other than keeping military and civilian salaries constant this year.
To formulate a budget for a country like Pakistan is a major challenge and no one is understating the associated difficulties. However, the economic team leaders need to agree to realistic targets, their impact on the poor and vulnerable and last but not least their capacity to implement the politically challenging structural reforms particularly with reference to the power and tax sectors within a specified time period. That sadly appears not to have been done when the programme was agreed in May last year and given the obvious delay in the release of the second tranche this disturbing factor appears to be relevant to this day.
