Saturday September 18, 2021

Up in the air

August 03, 2021

LAHORE: The apex tax agency’s performance has been overshadowed by the failings in other economic indicators, fueling economic uncertainties.

That the Federal Board of Revenue (FBR) collected Rs410 billion tax revenues in July –Rs68 billion above the target is a good news. The continuous decline of rupee is a bad news. The surge in current account deficit is a worrying development. Inability to control inflation is taxing poor.

One must commend the efforts of FBR that found a way to increase revenues despite eliminating or reducing duties on over 4,000 industrial raw materials. The increase though still is based on exceptionally revenues collected at the import stage.

In fact the import based revenues are higher than revenues collected from domestic economic activities. Sales tax collection from domestic players also increased 25 percent. This depicts increased economic activities. The decline in income tax collection puts a question mark on the performance of Inland Revenue department as increased economic activities should have resulted in higher income tax collection as well.

Depreciation of Pakistani currency is always worrisome for businesses and public. Latest data indicates rupee shed 3.1 percent of its value against the US dollar in the interbank market last month.

The rupee lost 54 paisas against the greenback and closed at Rs162.43 to the dollar on Friday as compared to Rs161.88 a day earlier. In the inter-bank market it has already breached the Rs163 barrier. The currency market reacted to sharp increase in current account deficit in June 2021.

The current account deficit is likely to further widen evident from the record revenue collection at import stage. In June total import bill breached $6 billion barrier for the first time in our history. The imports in July are likely to be higher. This means the pressure on rupee would further increase. Let us hope the exports maintain their growth and remittances remain stable.

Otherwise the pressure on rupee would be unbearable. Rupee has also been witnessing pressure in the post-budget period on account of rising imports led partly by higher commodity prices and machinery. The rupee depreciation in July alone has added additional Rs1,100 billion in external debts (taken in dollars).

The Roshan Pakistan Account may withhold remittances and pay their families from the profit that would be 3 percent higher in local currency. Going forward the economy would be in uncertain territory. The inflation is likely to go up. Imports would become more expensive as will be local products based on imports. The so called engineered stabilisation would evaporate in no time. Economy is a package in which all factors have to be managed prudently. The FBR has performed better than expectation but we should not forget we are operating with huge fiscal deficit. Some improvement in revenues would minutely reduce the deficit.

The slippage in direct taxes should be taken seriously. We would remain in dire straits unless we increased our tax base substantially. The current increase in revenues was from the already registered taxpayers. Tax evaders still move freely.

The central bank is delaying the increase in policy rates on one pretext or the other even at the risk of rupee stability. This cannot go on indefinitely. The central bank should act now to avoid drastic measures few months later. The economy can absorb policy rate increase of 0.5 percent quarterly but it would not be in a position to bear a policy rate increase of 2 percent six to nine months later. That is if the things remain moving in the current direction.

Increasing petroleum rates in the global market are beyond governments’ control. But the state failed to act in time when the rates were increasing. The OGRA summaries for fortnightly increases in petroleum rates were vetoed for long. Ultimately the government was forced to increase petrol rate by hefty Rs5.40/liter three fortnight back.

Now it is regularly increasing the rates every fortnight. The rulers must understand they cannot take public appeasing measures in areas where the rates are determined outside its jurisdiction. It can forgo petroleum levies but cannot afford to sell it below cost.

Absence of provincial coordination is adding to the woes of the federal government particularly in Sindh that is the hub of industrial and commercial activities. The issue should be resolved on give-and-take basis through negotiations.