New government immediately after assuming power started working on reviving the economy of the country. Federal Minister for Finance, Revenue, and Economic Affairs presented certain revisions in the federal budget for fiscal year 2018-19 approved in May 2018 to the parliament in the second week of September 2018. “Finance Supplementary (Amendment) Bill, 2018” or commonly called a Mini Budget is mainly aimed to; improve the tax revenues by removing certain fiscal reliefs, increase spending under public sector development program and deploy funds for the construction of affordable housings in the first phase. According to Finance Ministry, budget deficit will expand 7.2 percent by the end of the ongoing fiscal year. It is being said that previous government overestimated revenues by Rs. 350 billion, understated expenditures by Rs. 250 billion and there were few other adjustments, resultantly there is a difference of around Rs. 890 billion in the projected and budgeted figures.
Some of the key revisions in the federal budget are as follows; budget deficit to be contained to 5.1 percent from earlier target of 6 percent; Federal Public Sector Development Program (PSDP) to be increased by 10 percent and is set at Rs. 725 billion; withdrawal of restriction on purchase of new motor vehicles and purchase of immovable property of value exceeding Rs. 5 million by the non-tax filers; tax exemption on salaried class with taxable income of less than Rs. 2.4 million to be maintained while upward revision is made for individuals earning taxable income of more than Rs. 2.4 million; withholding tax on banking transactions for non-tax filers to be increased to 0.6 percent from earlier 0.4 percent; increase in custom and excise duties in cigarettes and expensive cell phones (in fact more than 5,000 items); and construction of nearly 8,276 houses for poor segment with immediate release of Rs. 4.5 billion in the first phase.
On one side, mini-budget was necessary to stabilize the economy because of crisis-like situation with history’s highest current account deficit and fiscal deficit of 6.6 percent of GDP and on other government is focusing on relief measures for the common man. In the mini budget, government has taken certain steps to support the agriculture sector; there was a shortage of fertilizer in the country in the last kharif season and farmers had to pay higher prices for the fertilizers. In order to provide relief to the farmers for upcoming rabi crop, government is allowing import of fertilizer, providing subsidy of Rs. 6 to 7 billion on fertilizer and is also sharing the differential of price of LNG currently being supplied to the fertilizer plants in Punjab.
Government has decided in the mini budget to extend the health safety card to Islamabad, FATA and Punjab, which was earlier implemented in Khyber Pakhtunkhwa though estimated cost of this scheme has not yet been announced. This scheme will benefit millions of people and can be a wonderful scheme if implemented in its true spirit. In addition, federal government has decided to impose regulatory duties on 150 luxury products, which will help government in controlling import bill to some extent and would also become a source of revenue collection. Government is also focusing on measures to ease its cash outflows by imposing duties on import of auto parts and cars, which is one of the biggest imports of Pakistan. There is a positive development that government has increased federal excise duty on purchase of car having engine capacities above 1800cc to 20 percent as it will only impact the high income group. Therefore, measures currently being taken to reduce the trade deficits are viewed as positive and additional regulatory duties would ultimately reduce the trade deficits.
Though some positive measures have been taken but a particular step taken by the government is widely viewed as an encouragement to black economy and can potentially provide cover to land and automobile mafias. That particular step is allowing non-tax filers to purchase property in Pakistan, which is under severe criticism from independent economists hence government is considering to withdraw this concession in near future.
Federal Minister preferred to present a broad outline of the measures they are going to take in addressing serious economic issues currently Pakistan is facing but it is not clear how these measures will translate into cash and what would be the sources of funding the gap. The dust will settle in next few weeks and sources of financing will be clear (internal, external, debt, sovereign support or IMF), which will help in understanding the outlook of the economy. Just before the mini budget, prices of gas have been increased whereas increase in the prices of electricity and fuel is on the cards. In another development, government is also planning to approach IMF for financial support, IMF team is visiting Pakistan these days and have held various meetings with the government officials. Traditionally IMF asks governments to increase prices of utilities and reduce development spending. There is a strong perception in the financial sector that government is taking such measures in anticipation of approaching IMF thus giving an impression of not taking any pressure from the prospective debt provider. Despite taking such measures, fiscal deficit is estimated to marginally come down from 5.1 percent to 4.9 percent of GDP provided fiscal discipline is maintained. However, these increments will have a serious negative impact on the ordinary person. Needless to say, increase in the prices of gas, oil, and electricity would increase inflation and further slowdown the economy.
Pakistan debt repayment is around US$8 billion in current fiscal year, which is another challenge for the government. Previous government is blamed for debt-driven growth which had its own merits and demerits. But current government must take such steps to first stabilize the economy and thereafter move on to the growth trajectory that is linked with development and not with debt and fiscal deficits.
Government is presenting a complete melt down of the economy which has a political motive and inviting foreign investors to invest in Pakistan with this presentation would probably not get a positive response. Moreover, it has become a normal practice to blame previous governments for fudging numbers and presenting false reports to the financial institutions and public. It is a serious matter, damages credibility of state institutions (including ministries) and has not helped Pakistan before and will not help now either. It is important to hold those accountable who fudge numbers and make them an example so that such practices could be controlled in future.
Federal Minister for Finance, Revenue, and Economic Affairs, says that “these are difficult times, and they call for difficult measures. But we also need to make sure the burden of our economic measures fall on those who can bear it.” Carefully studying the measures currently being taken by the finance ministry shows that government is taking a safe route of collecting cash by increasing tax rates and regulatory duties. It is expected that the prices of more than 400 products will increase due to various measures taken by the new government. It is widely believed that if challenges currently being presented by the government are to be believed then the steps being proposed by the ministry are not enough to address them. It is important that mini budget should not appear as an accounting exercise but to reflect government’s policies, support economic growth and bring improvements in the economic conditions of the common man. Moreover, instead of taking short term measures, government needs to work on long term measures, which could put the economy back on track.