Dr Hafiz A Pasha
The budget of 2022-23 has been framed with agreement of the IMF (International Monetary Fund) as part of the ongoing Extended Fund Facility which is expected to continue up to June 2023. The key objective is to pursue severely contractionary fiscal and monetary policies to bring down the current account deficit by almost 46% from $ 17.3 billion in 2021-22 to $ 9.4 billion in 2022-23 and thereby limit the external financing requirements for the year.
Consequently, the pressure is to bring down sharply the budget deficit and generate a primary surplus. The proposed reduction in the consolidated budget deficit at the time of presentation of the Federal budget in June was 2.2% of the GDP, from 7.1% of the GDP, according to the revised estimates for 2021-22, to 4.9% of the GDP in 2022-23. This has increased to 3% of the GDP since finalization of fiscal operations, which revealed the actual deficit in 2021-22 higher at 7.9% of the GDP.
The proposed reduction in the fiscal deficit from 7.9% of the GDP to 4.9% of the GDP is very ambitious and unrealistic. Over the last ten years, the maximum reduction of the fiscal deficit in any one year was 2.5% of the GDP in 2013-14. The deficit was brought down from 8% of the GDP in 2012-13 to 6.5% of the GDP in 2013-14.
The extraordinarily large deficit in 2012-13 was due to the big retirement of circular debt of the power sector of Rs 362 billion, equivalent to 1.5% of the GDP. Exclusion of this once-and-for-all payment implies that the reduction of the deficit was only 1% of the GDP.
The unrealistic expectation of the reduction of the budget deficit by 3% of the GDP is further demonstrated by the outcome of fiscal operations in the first quarter of 2022-23, which indicate that the deficit was already close to 1% of the GDP. It is larger by 0.3% of the GDP compared to the deficit of 0.7% of the GDP in the first quarter of last year. At this rate, the likelihood is that 3% of the GDP reduction in the deficit over the year is infeasible.
The outcome of fiscal operations in the first quarter yields many examples of unrealistic budget targeting in 2022-23 as follows:
(i) Non-tax revenues are expected to show an unprecedented growth rate of 63% in 2022-23. The actual outcome in the first quarter is a decline in revenues of 15%. Achievement of the annual target will now require a growth of 84% in the next three quarters.
The basic mistake was the projected jump by over Rs 700 billion in revenues from the petroleum levy. No allowance was made for the fact that with a near doubling of the retail prices of petroleum products and rise in the levy to Rs 50 per litre there would be a severe contraction in demand and consequently in the tax base.
(ii) Federal current expenditure is expected to increase only marginally this year by 1%, largely through a quantum reduction in subsidies of 54%. The divergence in the first quarter is unbelievable. Current expenditure has increased by as much as 42%. This is due to the subsidies actually going up by 26%, rather than falling. Also, debt servicing has been budgeted to increase by 24% over the year, but in the first quarter it has gone up by as much as 53%.
(iii) The provincial cash surplus is budgeted to increase by 114% in 2022-23. Instead, it has fallen by 21% in the first quarter.
(iv) The annual budget deficit is expected to contract in 2022-23 by 28% in relation to last year’s level. It is perhaps a mockery of the annual target that it has increased by 84% in the first quarter.
(v) The Ministry of finance has projected the GDP at Rs 78197 billion in 2022-23, based on the Annual Plan estimates of 5% GDP growth rate and 11.5% rate of inflation. Both projections are highly unrealistic. A better estimate of the nominal GDP is by the IMF of Rs 83,739 billion. The latter estimate will imply that the budget deficit is somewhat lower at 0.9% of the GDP in the first quarter.
Given the above massive deviations already in the first quarter, the annual budgetary framework and targets for 2022-23 have become infeasible and redundant. This is further aggravated by the large negative impact of the floods on the budgetary position in the form of lower revenues, and higher bill of subsidies and grants. Even a massive cut in development spending, as has already happened in the first quarter, will not contribute in a big way to bringing the budget deficit close to 4.9% of the GDP.
The credibility of the budgetary process is badly affected by the resort to extremely unrealistic targets. As agreed, a mini-budget will no doubt need to be presented to reintroduce the sales tax on petroleum products. However, it should be appreciated by the IMF that the big fall in GDP growth rate due to the floods and the continuation of above 20% rate of inflation are leading to big increases in the number of unemployed and population below the poverty line.
We hope that during the process of the Ninth Review the IMF will show a ‘human face’ and not make demands to close the budgetary gap through excessive additional taxation.
The appropriate action would be to accept an increase in the annual deficit target from 4.9% of the GDP to 5.7% of the GDP. This will imply a target reduction of 2.2% of the GDP, which was the magnitude of reduction originally targeted for at the time of presentation of the budget. It will also create some fiscal space for flood-related spending.
(The writer is Professor Emeritus at BNU and former Federal Minister)