The year 2018 was a unique year in the history of Pakistan as it witnessed a new political party coming into power which, since 1988, was being shared predominantly between two political parties including an 8-year period of General Pervez Musharraf’s rule (1999-2007). With the transition of power completed in August 2018, the second half of the year mostly saw the reversal of populist decisions taken by the outgoing government during their last budget presented in May 2018. The present government (quite literally) finds itself caught between the devil and the deep sea as the timeline for conclusion of talks with the IMF and FATF is approaching fast and will test the government’s ability to keep its feet grounded while continuing to deliver on its promises.
The present government has inherited a host of problems but instead of blaming its predecessors, it needs to put in place effective strategies so that it can take the challenges head-on. It’s heartening to see that the government, apart from single-minded focus on anti-corruption, is now coming up with policies on improving tourism and tax administration amid feeble Rupee, rising inflation and news of next mini-budget. The government intends to levy FED on domestic and imported cars. With a blend of new taxes and rupee devaluation, the tax collection could increase to Rs4.5 trillion during the current financial year, Rs5.8 trillion by June 2020 and Rs7 trillion by June 2021, respectively.
The government has also pinned its hope on recovering Rs75 billion, which are presently stuck up in courts and the apex court has constituted a special bench to hear tax-related cases. Non-tax revenue collection target has been suggested to be raised to Rs1.2 trillion straddling from the sale proceeds of divesting of two power plants and sale of 3G and 4G licenses by the Pakistan Telecommunication Authority (PTA). The government intends to raise tax revenues by 3% of GDP to 18.1% by 2021-22 and FBR’s tax collection from 11.2% to 13.9% in three years’ time. This would be a herculean task as this would need major tax efforts.
Regarding monetary and exchange policies, the government has suggested its willingness to further devalue the rupee in the present financial year (worst form of taxation), which would help in raking additional revenue collection at the import stage. Interest rate will be further changed in the forthcoming monetary policy announcement at the end of January. This hike could be in the range of 50 to 100 basis points over the existing rate of 10%. These steps would enable to bolster forex reserves to about 2.5 months of import cover or $13 billion by end of current FY19. However, this will impact the economic growth rate, which will nosedive to 3.9% in FY19 from over a decade high of 5.8% in FY18.
Amid this environment, banks and financial markets still seem a bit confused and are waiting for certainty. It was uncertainty-driven panic that triggered the stock market crash in which the KSE-100 Index fell 1,328 points, the biggest one-day decline in the last 15 months. It was uncertainty that a 7.5 percent rupee decline led to the widening of the gap between interbank and open market exchange rates. It is uncertainty that, combined with the Rupee’s fall, is now fueling inflation. The government has agreed to increase energy prices even before making a formal request for the IMF bailout. Once the IMF approves lending, further price hikes are expected. The Rupee can fall a little more as our foreign exchange regime is not flexible. Uncertainty in markets may continue till the time we know the specifics of the IMF program and the conditions attached to it.
A resumption of balance-of-payments support from the IMF may help remove uncertainties but the external sector can improve only if exports and remittances continue to grow in double digits for a long time, imports remain static or fall and foreign direct and portfolio investments start coming in.