Uncertainties and aspirations

“Uncertainty” was perhaps the best description by Dr Abdul Hafeez Shaikh of the next year’s federal budget. He had valid reasons. But this corresponded well with the usual criticism of an “unrealistic” budget with “ambitious” targets.

To begin with, the budget seeks to increase the Federal Board of Revenue’s (FBR) tax collection by almost Rs1.06 trillion or 27 per cent — i.e. from Rs3.9tr to Rs4.963tr — without a revenue plan or “any new tax”. The budget speech and documents had left this unaddressed, but Dr Shaikh explained it in his post-budget briefing in a transparent manner.

“Pakistan is such a big country that Rs1,000bn additional revenue is not a big thing if the economy gets revived. But nothing can be said with certainty when the situation will get back to normal and when demand will pick up in countries where we export. I cannot say with much confidence, but we have to make best efforts,” he said. “We have kept aspirations in this budget.”

That means even if the economy grows more than double the targeted 2.1pc growth rate, though highly unlikely, the authorities will need to come up with a backup revenue plan maybe in three to six months for a minimum of Rs500 billion. Based on the projected rate of inflation and GDP growth, the automatic increase in revenue could be no more than Rs350bn. About Rs200bn additional revenue is anticipated through minor tinkering with existing tax rates or procedures including those relating to documentation.

The final gap is now estimated to be around Rs1.65tr that works out at almost 4pc of GDP. We have the history of revenue slippages, but this is a rare phenomenon. Tax collections have actually gone down for two consecutive years. That gives reasonable evidence to suggest the revenue target is not only ambitious but also uncertain.

Therefore, the fiscal deficit target pitched at 7pc of GDP or Rs3.2tr becomes unrealistic at the very outset — even before the budget is passed by parliament. Almost everybody dealing with the budget knows that 9pc, give or take 0.5 percentage points, is going to be the final fiscal deficit next year based on background discussions. So this will be the third consecutive year for the fiscal deficit to stay at an elevated level of around 9pc.

On top of that, what needs to be kept in mind is the fact that indirect taxes are the largest source of Pakistan’s overall revenue. They highly depend on the revival of economic and business activities and GDP growth. The next year’s target for 2.1pc economic growth can be subject to slippages if demand in the global economy remains slower than anticipated.

That’s why Dr Shaikh agrees that recovery will be contingent upon the severity and duration of the pandemic and lockdowns at home and in international markets. On the positive side, premier’s adviser on commerce Abdul Razak Dawood is reporting the revival of export orders in textile and leather and over a billion dollar worth of export orders from Africa. But all this is subject to confirmation in days ahead.

The major revenue spinner for the federal government will remain the petroleum sector. Here, the petroleum levy will see about 73pc increase to Rs450bn against Rs260bn this year. This is the single largest item in “Rs501bn other taxes” and its beauty is that it remains within the federal kitty unlike FBR taxes of which almost 60pc go to the provinces.

Non-tax revenue will be on the lower side next year given a reduction in the profits of the State Bank of Pakistan (SBP) from Rs785bn to Rs645bn and the unavailability of telecom licence–based revenue. But the government expects about Rs60bn higher revenue from markup and dividends from public-sector entities and others.

More uncertain is the provincial surplus as the provinces struggle to adjust their expenditures amid massive revenue shortfalls in federal taxes. They already scaled down their development budgets in the current year. They plan to limit the spending to Rs674bn next year from almost Rs800bn budget estimates for the current year.

Yet the deficit financing will remain the key challenge. It will continue to be a source of further borrowing. Yet another challenge is the growing pension bill and will remain so in the medium to long term. The enormity of the situation is that the pension bill for the next year will be around Rs470bn — almost equal to Rs475bn needed to run the entire civil government. The pension bill involves Rs111bn of civilian pensioners and Rs369bn of military pensioners.

The Ministry of Finance has made transparent the risks to the budget. It concedes Pakistan is in recession as its GDP contracted by 0.4pc this year and minor growth next year is subject to two uncertainties — worsening global economic situation and prolonged recovery in domestic markets — and so are the revenue targets.

On top of that, the energy sector’s losses continue to be a key risk to the budget in terms of both the government’s failure to reduce losses leading to a higher circular debt and a source for tariff increase. Almost similar but of a lower magnitude are the losses of other public-sector entities, which need to be privatised or restructured. This is easier said than done in difficult market conditions.