Money Matters

A high-stakes game

Money Matters
By Mehtab Haider.
Mon, 07, 19

The yawning twin deficits, the budget and the current account, continue to be one of the most disturbing nightmares for the country’s economic managers, who seem to be at an utter loss on how to squeeze them down to the targets tied with International Monetary Fund (IMF) bailout agreement.

The yawning twin deficits, the budget and the current account, continue to be one of the most disturbing nightmares for the country’s economic managers, who seem to be at an utter loss on how to squeeze them down to the targets tied with International Monetary Fund (IMF) bailout agreement.

The budget deficit is rocketing towards the sky and on the external account front the government has also revised its projection upward by $1 billion from $12.5 billion to $13.5 billion for the fiscal year 2018-19 ended on June 30, 2019.

The situation has worsened to the extent that all the powerful institutions of the country are now unanimous that there could be no sovereignty without economic strength.

Chief of the Army Staff (COAS), General Qamar Javed Bajwa, in a seminar on economy stated that Pakistan was going through a difficult economic situation due to fiscal mismanagement and it could not get out of it unless the nation fully supported the government’s difficult but quintessential decisions for long-term benefits. The army chief also said there could not be any sovereignty in the absence of economic sovereignty, adding that no one alone could succeed in difficult times unless the nation rose to the challenges unitedly.

Pakistan Tehreek-e-Insaf- (PTI) led government has completed the first financial year of its rule after coming to power on a dismal note in terms of its performance on the fiscal front, while its efforts for boosting exports also made no notable difference.

The fiscal woes of the country are going to worsen keeping in view the performance of the government in the last fiscal year. Although, the fiscal accounts have not yet firmed up, but there are indications that the country is going to witness the highest ever absolute budget deficit in the last fiscal year.

Amid rising expenditures and historic revenue shortfall in Federal Board of Revenue’s (FBR) tax and non-tax collection, the budget deficit is exceeding Rs3 trillion mark or 8 percent of Gross Domestic Product (GDP) against Rs2.2 trillion or 6.6 percent of the GDP in the fiscal year 2017-18 during the previous government.

The whole basis of approved budget for 2019-20 have shaken as the government had estimated its budget deficit at 7.2 percent of the GDP, but it was going to miss it with a substantial margin, making it even more harder for the incumbent regime to deliver on budgetary front under the tight scrutiny of the IMF.

The budget-makers had assumed that the FBR was going to collect revised tax target of Rs4,150 billion in fiscal year 2018-19 and they envisaged a highly ambitious target of Rs5,555 billion on the basis of nominal growth, taxation measures, and then enforcement in the fiscal year 2019-20 to achieve its desired goal.

The whole assumption that was based on Rs4,150 billion collection came down crashing as the FBR could not even go close to this figure. The FBR has projected a shortfall of around Rs300 billion, but in reality it might be worse than desired projections.

The increased shortfall in the FBR revenues will further balloon the budget deficit figures for July-June period of 2018-19, having multiplying negative impacts on overall economic situation of the country. In the first year of the PTI, the center and provinces slashed down development spending so the project-related spending shrank.

The country is heading towards stagflation with low GDP growth and rising inflation, a recipe for disaster at time of sluggish economic activities. The economy is in the grip of vicious cycle and the need of the hour is synergy and close coordination at all centers of powers for achieving objectives.

The budget deficit is known as mother of all economic ills so the highest ever budget deficit in absolute figures will have far-reaching negative impacts for the economy. It will have weigh on external account of the economy as well by increasing demand for imports so the pressure on current account deficit may not recede as projected by the economic managers.

The projection on the front of current account deficit has been revised upward keeping in view pressures witnessed in March and April 2019. Current account deficit crossed $1 billion mark in both the months against a projection of bringing it down within the limit of $700 to $800 million a month. One of the reasons behind this among many others was the adjustment of piled up liabilities from China. Now the State Bank of Pakistan (SBP) is keeping the record on books in a gradual manner and it was reflected in those months.

The trade gap has not narrowed down abruptly as being projected by the finance and trade managers so it’s also causing pressure on external accounts of the economy.

Under the IMF programme, it will be the biggest challenge for the government to make more accelerated adjustments on domestic and external front of the economy simultaneously. The government has somehow managed to pass the budget through the parliament but it still faces the challenge of implementing it in true letter and spirit.

The government has abolished zero-rating regime for five export-oriented sectors including textile, garments, carpets, surgical, and sports goods, which will result in accumulation of billions of rupees worth of refunds for exporters. Also, the FBR might be faced with the challenge of increased ‘flying and fake’ invoices so if the government wants to avoid leakages a strict monitoring mechanism will have to be developed, otherwise a massive release of refunds will dent the national exchequer big time.

If the FBR failed to devise a comprehensive plan to implement and enforce the budget, the tax system would have to face a major blow in this fiscal year (2019-20) because the government has made major changes in the law and envisaged massive documentations, which pose a challenge for both tax machinery as well as for taxpayers for ensuring compliance during the course of this year.

If the system and procedures are not improved and technology is not employed, then this exercise, if it goes wrong, can render the whole taxation system of the country dysfunctional. So this is an opportunity to streamline the taxation procedures and devise a roadmap for the next five years as this is the right way forward for improving tax-to-GDP ratio. Any systemic change without well-thought-out strategy will lead the FBR nowhere and might result in another suspension of the IMF program anytime during the current fiscal year.

The writer is a staff member