LAHORE/KARACHI: Economists believe that the government has given relief to the industry for the easily achievable 4.8 percent GDP growth for the next fiscal, but it would have to be vigilant of growing commodity and oil prices in the international market and pass on the impact to avoid any financial crisis.
The relief was possible due to government’s decision to go soft on the International Monetary Fund (IMF) given austerity measures on the back of US support.
Former Chief Economist Pakistan Dr Pervez Tahir said increase in Public Sector Development Programme (PSDP) programme showed that the government had surrendered to its political allies and would release funds to them. Once it would release funds for the allied parties’ development schemes, it would also release funds to its MNAs and party representatives
The global economy has witnessed recovery after Covid-19 impact; and so has Pakistan. But the bigger question was whether the incumbent government would be able to sustain growth; or it would follow the path of its predecessors and only focus on election spending and short-term decisions to appease the public, leaving the next government to face challenges.
The government could not borrow from the State Bank of Pakistan (SBP) and only had the option to borrow from commercial banks, which would ultimately benefit the banking industry, Dr Tahir added.
On account of increase in minimum wage and increase in salary and pension, he said minimum wage was not implemented, expect in few exporting sectors and MNCs, and one should keep in mind that the Pakistan Peoples’ Party had increased salaries by 50 percent.
“Thus, increase in salaries is negligible with growing inflation,” he added.
The new budget shows that the government was willing to get rid of the IMF programme to support and provide relief to the industry and construction sector. However, the question was where this support would come from, as in the past the Federal Board of Revenue (FBR) has never been able to achieve its revenue collection targets.
Former finance minister Dr Salman Shah said, “I think it’s an innovative, pro-growth, pro-poor and investment budget. This is a complete package, which announces direct and indirect cash transfers to low-income groups, and provides soft loans to the young people.”
He said the tax relief announced in the budget would boost investment in the capital market. There was a need to be investment-led and non-debt to create growth. “The targets set in the budget are ambitious but achievable. The real issue is more people getting into a tax net. For this purpose, the government is focusing on implementing FBR reforms.”
Topline Securities CEO Mohammed Sohail said, “It is a spending-led confidence building budget exercise. The biggest challenge will be to deal with the IMF and rising commodity prices.”
Analysts consider the budget growth oriented, offering major concessions to encourage manufacturing via reduction in custom duties on import of raw material. It also benefits sectors including textiles, footwear, pharmaceuticals, electric cars, mobile phones, automobiles below 850cc (reduced GST, withdrawal of FED).
Stock market also benefitting with lower CGT from 15 percent to 12.5 percent to encourage investment.
The stimulus given to these sectors is dependent on stable external financial condition, forex reserves of $23.5 billion and current account surplus for 10MFY21. The target for workers’ remittances is $31.5 billion for FY22 against $29 billion estimated for FY21.
The finance minister in his budget speech has set a GDP growth target of 4.8 percent for FY22 compared to 3.9 percent (provisional estimate) for FY21. Budget 2021-22 is a growth centric budget with focus on sustainable economic growth, Prime Minister’s special initiatives (Kamyab jawan, Sehat card, Billion Tree Tsunami), revenue mobilisation, development spending and quick disposal of refunds.
Federal PSDP outlay has been increased to Rs900 billion, up 43 percent YoY. The government has set a fiscal deficit target of 6.3 percent (as a percent of GDP) as compared to 7.1 percent (provisional estimate) for FY2021.
Economist Dr Naved Hamid, director at the Centre for Research in Economics and Business (CREB), said, “The government needs to be vigilant on global commodity prices, especially oil as increase in prices will affect petroleum development levy.”
Dr Hamid, also a professor of economics at the Lahore School of Economics and resident director of International Growth Centre (IGC) in Pakistan said that the collection of petroleum levy was already affected in the last quarter of the ongoing fiscal year, as the government did not pass on the impact of increase in price and instead reduced the lecy.
“Further, with eight percent inflation rate and five percent growth rate, government still needs to increase revenue collection to seven percent to meet the revenue collection target of 20 percent and above,” he said, reminding that “for this the government has to take unpopular measures”.
On IMF programme, Dr Hamid said that till the next review, government has to follow the fund’s suggested steps like increase in electricity tariff and other administrative measures, “failing will result in suspension of next tranche alongside suspension of other funds from World Bank, Asian Development Bank (ADB) and others”.
In a nutshell, if governance and administrative steps were not take in a timely fashion, fiscal deficit would increase, and if the impact of global commodity prices was not passed on, Pakistan could face the same situation it faced back in 2008 Musharraf regime.