InternationalVOLUME 15 ISSUE # 03

A faulty roadmap

Government spokespersons don’t tire of talking of a roadmap to increase economic activity and provide relief to the common man. But what is this roadmap, nobody in the higher echelons has as yet fully explained.

According to experts, there is no roadmap as such, except the International Monetary Fund (IMF) program which is being implemented currently by the Pakistan Tehreek-i-Insaf (PTI) government of Prime Minister Imran Khan. The IMF roadmap has been laid out in its full details and the government is working on it with full force. Among the prominent features of the program is the widely publicized amount of 38.6 billion dollars to be required from external sources to meet the 39-month-long IMF program objectives (including support from multilaterals and bilaterals as well as roll-over agreed with friendly countries). Simply put, this means that the country’s reliance on foreign loans is expected to register a huge increase during the IMF program period.

Secondly, there has been a quantum jump in the discount rate and rupee depreciation as part of the IMF conditionalities. This has greatly raised input costs and thus hit the industry hard. As a result, the large-scale manufacturing sector registered negative growth in the year just ended and there has been no evidence of an upward trend in the coming months. The auto sector in particular has been hit hard because the import of parts to manufacture, assemble cars domestically has raised input costs which, inclusive of taxation measures, have reduced the sale of cars considerably in the country. The demand for used cars has resurfaced and, if allowed, the possibility of closure of auto manufacturing, assembly plants would raise unemployment levels considerably. Additionally, taxes on intermediate raw material imports have dampened industrial outputs.

Media reports show that large as well as small and medium enterprises (including workshops) have been laying off workers. On the other hand, exports have not responded to the rupee depreciation significantly as a consequence of the adoption of the market-based exchange rate, which is a major IMF loan conditionality. As experts have noted, the July decline in the current account deficit can mainly be attributed to the Saudi 3 billion dollar oil facility which accounted for around 60 percent of import reduction in July. This should be a source of concern and underlines the need for the government to focus on revamping the tax structure.

Surprisingly, budget expenditure has not been curtailed under any head and while the increase in markup – from 1,987,319 million rupees in the revised estimates of the last year to 2,891,449 million rupees in the current year – maybe understandable, yet outlays on all other items have also risen quite dramatically. Pensions, for example, have risen by 23 percent, defence by nearly 11 percent, subsidies by 6.4 percent, grants and transfers by 63 percent and so on.

Total current expenditure is budgeted to rise by 33 percent (1.5 trillion rupees) which in the event that there are no contingency payments during the year would imply 115 billion rupees may be used to take account of slippages in revenue. Federal development expenditure has been raised from 500 to 701 billion rupees, a raise of 40 percent, with the bulk to be spent on social infrastructure. However, as we all know, the impact on growth of an outlay on social as opposed to physical infrastructure is considerably less.

The picture on the revenue side is equally bleak. The Federal Board of Revenue (FBR) is required to generate 5.5 trillion rupees, 34 percent more than what was achieved in the revised estimates of the year before, which is not likely to be met as the growth rate has been projected at 2.4 percent.

There are contradictions galore in the economic roadmap. The government claims to facilitate the business community to get loans, but the big hurdle is the high discount rate. On the other hand, despites promises of providing relief, the general public, burdened with high inflation, perhaps the highest in Pakistan’s history, continues to suffer erosion of their income earned due to the government’s continued high reliance on indirect taxes with private sector employees not being given a pay raise commensurate to the rate of inflation.

Needless to say, the roadmap of the revival of the economy needs a revision in many of its parts. Above all, the government needs to reduce its expenditure, with the objective of balancing its books because the projected tax collection exercise has been rendered impossible because of the fiscal slippages suffered in fiscal 2019 that forms the basis for targets agreed with the IMF for fiscal 2020 – the first year of the IMF program.

The conclusion is that we need to try some out-of-the box solutions for reducing expenditure for achieving the primary deficit target agreed with the IMF under the program without further burdening the common man with new taxes or increase in the rates of existing taxes.