Thursday May 26, 2022

Skimming through Budget 2021-22

June 12, 2021

In the given circumstances, Budget 2021-22 presented yesterday by Shaukat Tarin could not have been better. Let me explain why: the art of preparing a budget in Pakistan is balancing needs with resources.

I classify our needs in four Ds: debt servicing, defence, day-to-day administration, and development. Resources are generated from two streams: federal revenues (tax collection and non-tax income) and borrowing (from domestic banks as well as external sources). Since the needs always outrun the resources, the makers of Pakistan’s budgets continuously struggle to match them.

What makes this complicated task even more complex is the fact that the strings attached to borrowing from the IMF are always directly linked to such budgetary indicators as tax collection, inflation, primary deficit, interest rate and currency value. When Pakistan is getting financial assistance from the IMF, as it is doing now, the making of the budget starts with the setting of a target for primary fiscal deficit – the gap between revenue and expenditure after debt servicing. The revenue gets inflated, and the expenditure is deflated in such a way that the imbalance between them does not exceed an IMF-mandated deficit target.

A ‘V’-shaped recovery of a Covid-struck economy resulting in double than expected growth (3.94 percent) for the outgoing fiscal year helped Shaukat Tarin make some bold moves by saying no to the IMF’s standard recipe of resource mobilization. Refusing to increase the tax burden on existing taxpayers and resisting the demand for electricity tariff increase, he is eying on expanding the tax net through use of data and technology.

While listening to the budget speech, my initial reaction was that the finance minister is trying to reduce the cost of doing business. Abolishing 40 percent withholding taxes, withdrawing customs and regulatory duties on many items, limiting the discretionary powers of FBR officials, and introducing third party audit in case of any dispute between the FBR and the taxpayer would result in a reduced cost of doing business, improve ease of doing business, and – if implemented as perceived – help improve the trust deficit between the people and the tax collectors. Reduced cost and improved ease of doing business will help in the revival of the economy that should in turn result in additional revenue collection, a rationale for the historic high revenue target in the budget.

The good news is that the budget has something positive for almost all walks of life. The industry and corporate sectors seem satisfied on the different measures that would improve their profitability and productivity. Agriculture is a provincial subject, and I am expecting the provincial governments to allocate money for agriculture. However, the federal government too has allocated money for some vital interventions in the agriculture sector. The duties on silos and warehouses are reduced to enable the farmers to store their produce and avoid exploitation by middlemen. Provision of collateral-free loans for small and medium enterprises (SMEs) will help SMEs to continue providing jobs in the informal sector.

Reduction of duties and taxes on small vehicles (on average a small car would be Rs200,000 cheaper) will help some to graduate from motorbikes to cars. It will also increase the production of small cars, creating some jobs as well as additional revenue for the FBR. Likewise, record allocation for different initiatives of the Ehsaas Programme, for afforestation, water security, the Covid-19 vaccine, power infrastructure, reducing regional disparities, climate change, and a special grant for Sindh are all steps in the right direction.

To improve the purchasing power of the people, the minimum wage has been increased to Rs20,000 per month. Likewise, a 10 percent increase has been made in government pays and pension. Admittedly, these increases are not sufficient to cope with inflation. However, let me take you back to the four ‘Ds’ and limited resources.

Net federal revenue after provincial share from the divisible pool for the next year is budgeted at Rs4497 billion. On the expense side, the three mandatory and non-discretionary expenses – debt service/repayment (Rs3060 billion); defence (Rs1370 billion); and (running of) day to administration, pay and pension (Rs1119 billion) are budgeted at Rs5549 billion. There will be a shortfall of Rs1052 billion rupees to meet these mandatory expenditures.

Development-related expenditures which include PSDP (Rs900 billion), grants and direct transfers (Rs1850 billion), subsidies (Rs682 billion), and Covid-19 related expenses (Rs125 billion) are non-mandatory and discretionary expenditures (that’s why they are often curtailed) and are budgeted at Rs2875 billion. The total shortfall for the above-mentioned four ‘Ds’ is Rs3927 billion.

The government is expecting some proceeds from privatization and some provincial surplus but would have to borrow at least Rs3200-3500 billion if it gets some additional revenue from the above-mentioned heads. This calculation is valid if the government sticks to the budgeted fiscal deficit. Any unforeseen expense or slippage in revenue (increased fiscal deficit) – and the need for borrowing would increase.

Let us talk of some bad news as well. The bad news is that the things that pinch an ordinary citizen are no more under the purview of the federal budget. I am referring to energy prices; electricity and fuel – both oil and gas – whose prices are determined by Nepra and Ogra and are linked with the international market.

The government has resisted the IMF’s demand to increase the component of petroleum levy in the budget, yet the way petroleum prices are increasing in the international market (today’s price of crude is $71 per barrel), it will soon be impossible for the government to keep subsidizing the oil process. Commodity prices in the international market are also increasing. This will influence domestic prices of edible oil, pulses, and other imported items. If these trends continue, the government will have to borrow more – or pass on the impact to consumers.

The next fiscal year is about to start. Let us see how it unfolds for the people.

The writer heads the Sustainable Development Policy Institute.

Twitter: @abidsuleri