This is the election year in Pakistan so any discussion on budget is to be read in this context. The corporate tax and Super Tax is likely to remain there, however, there may be some relief on the individual tax front. While it may be debated whether the outgoing government should present the budget or not, the scope of budget is likely to be expansionary as the present government will try to woo the voters to the maximum extent possible. This will be an additional burden on the fiscal deficit which may swell above 6% of GDP. It remains to be seen whether the incumbent government has the courage to reverse the expansionary policies likely to be announced by this government as doing so might result in loss of popularity.
The expansionary nature of the on-going fiscal policy is inevitably adding to aggregate demand and putting pressure on the import bill, thereby exacerbating the problem of a large and growing current account deficit with trade deficit not that far behind. Planning and formalizing a full year budget is a daunting task, when the market is still unconvinced about how the government intends to manage the external deficit, and the vicious borrowing cycle that the country has entered.
The government is targeting a 6.2% growth for the next fiscal year, anticipating key impetus originating from the China-Pakistan Economic Corridor. The next budget’s outlay is expected to be Rs5.7 trillion which is anticipated to be supported by:
- 3.8% growth in agriculture
- 7.6% growth in industry
- 6.5% increase in services sector
- 6% inflation
- 17.2% of GDP for investments
- 13.3% of GDP for savings
- $ 27.3 billion for exports
- $ 56.5 billion for imports
- $ 12.5 billion for current account deficit
However, there is a big question mark as to how the government intends to achieve these figures in the absence of Coalition Support Fund (CSF) and mammoth debt servicing to the tune of Rs 1.6 trillion, which is a big drain on the budget.
The timing of the Economic Reforms Package (ERP) and Tax Amnesty Scheme (TAS) is equally questionable. Many allocations being made in next year’s budget are without any backup support in form of revenue. While it would be interesting to note whether ERP would be formalized in the upcoming budget, TAS also comes in conflict with the recent grey-listing of Pakistan by FATF. Any tax amnesty scheme must be in line with global standards on anti-money laundering. By offering wealthy Pakistanis a three-month time period to declare their so far hidden assets whether locally or abroad at a punitive rate of two to five per cent to whiten the wealth, Pakistan may attract the ire of international community which presently it could not afford. Such schemes would further reinforce world’s negative perception about Pakistan’s image. While the international repercussions are manifolds, on the domestic front, this scheme will protect the politicians from election and fiscal laws through declaration of their stashed money abroad.
Sustaining the growth momentum, ensuring fiscal consolidation, managing balance of payments and ensuring debt sustainability are some of the philosophies on which the budget should be based. Lowering taxes and tightening of foreign exchange regime will not result in increase in revenues and reduction of fiscal deficit. Likewise, reducing development expenditure will result in unemployment. The need of the hour is fiscal and monetary coordination which is missing. What is required is greater fiscal discipline, reforms in real-estate, power and agriculture sector and increased public-private partnership.