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Economic notes

September 25, 2018

From crisis to clarity


September 25, 2018

It is unfair to demand that the new government should be able to quickly turnaround the economy, which has been in a mess for nearly two years. In last week’s article, we had pointed out the difficulty that the nation faces in understanding the game plan of the government.

Some signals indicated that it was not going to the IMF while others pointed to measures planned in line with the requirement of a Fund programme. Another strand of thought argued against any such considerations.

It was in this backdrop that the so-called mini-budget was anxiously awaited. However, based on a close examination of the details available so far, this exercise hasn’t helped alleviate this anxiety. Let’s first examine the adopted measures.

The details about the measures are few. The finance minister made some remarks in the assembly, laid out the finance bill, and briefly spoke to the press. There is an unpublished one-pager that summarises the revisions in the budget, titled ‘Budget at a Glance – Updated Budget Fiscal Year 2018-19’.

The bottom line in the chart, after making a few adjustments in revenue and expenditure, is that fiscal deficit would be 5.1 percent of GDP as compared with 4.9 percent, which the previous government had budgeted. It is intriguing that a government that has stressed on a high level of debt as the single most important wrong in our economy has ended up budgeting a higher deficit (and, therefore, debt) in its first budgetary intervention. Clearly, someone has missed out on poor optics.

On a more substantive side, the minister has claimed that the inherited budget was based on unrealistic revenue and expenditure estimates, and actually had a deficit of 7.2 percent. This is a correct assessment, as we have noted in our previous article. But what is missing is a delineation of measures that would ensure that the new estimate of the deficit is more realistic. The few measures adopted aren’t sufficient to fill the gap.

Bringing deficit down by 2.1 percent (from 7.2 to 5.1 percent) will require a fiscal effort of Rs840 billion, either in increased revenues or reduced expenditures, or a combination thereof. The most liberal estimate of yields from the purported tax effort and development expenditure cut is Rs400 billion or one percent of GDP. Realistically, it is only one-third of one percent.

The tax effort of Rs183 billion includes Rs92 billion from so-called administrative measures, which fiscal experts won’t count as real effort. The saving in development expenditures, claimed to have been slashed to Rs575 billion from Rs800 billion, has been more than neutralised by an increase in other expenditures that have increased to Rs5,309 billion against Rs5,246 billion in the original budget.

There are few aspects of this budget that run counter to the avowed policies espoused by PTI leaders. First, the most vociferous concerns that the prime minister has invariably highlighted are the debt burden and borrowing for current expenditures. The budget doesn’t correct this course. A test to check this is to keep development expenditure higher than fiscal deficit. Unfortunately, the budgeted development expenditure – both federal and provincial – is less than 4.5 percent and, thus, below the deficit level of 5.1 percent, implying that the past trend is continuing.

Second, the measures miss out any savings on account of austerity whose outward manifestation, otherwise, is so pronounced in public debates. Even a small measure that could bring some reduction in current expenditures is missing. Translating austerity into savings of wasteful expenditures could have brought at least a couple of billions, if not tens of billions.

It is hard to believe that the government has finally discovered there is not much room for such savings, as this would run counter to the relentless hammering of past governments that its leaders had been doing.

Third, the government has missed out revenue opportunities. The previous government had given two misplaced tax concessions that sacrificed precious government revenue – a three-fold increase in the limit of taxable income and a massive reduction in tax rate from 35 percent to 15 percent.

Sensibly, the tax rate has been increased to 29 percent, but the enhanced limit has been retained. Not only have half the individual taxpayers been sent home, but a significant amount of revenue has also been lost. This contributes to the deficit. The government has once again contributed to the deficit by not retrieving revenue that was already accruing to treasury, and was callously forfeited by the previous government for cheap political gains.

The one good thing that the government has done is to do away with the ban on purchases of vehicles and immovable property by non-filers. It was a stunt used as a frill by the previous government to make a listless budget look decent. Those opposing its reversal are doing politics.

The non-filer category was not about allowing people to have access to markets, but to induce registration. Down the line, the FBR lost sight of this objective. This has to end after an intensive effort to get non-filers, once their purchases are known, to become filers. The permanent category of non-filers has to end.

The occasion, one had hoped, would be used to lay down the economic policy of the government along with some immediate corrective measures. We are afraid, either has been accomplished. The cause of the new government isn’t served either by missing the first opportunity to act in consonance with the needs of the economy or through the continuing uncertainty regarding its economic policy.

It is not merely about whether the country goes to the IMF or relies on friendly support. A clear vision and roadmap is badly needed by the markets. A host of challenges – privatisation, circular debt, capital markets, forex regime, SBP borrowings and interest rates – that have not even come under discussion so far await stabilisation. There is simply no time to lose. Numerous risks are brewing on the horizon, both in emerging markets dynamics and in international oil prices. Without macroeconomic stability, we will be ill-prepared to face them.

The writer is a former finance secretary. Email: [email protected]