NationalVolume 14 Issue # 15

Dwindling revenue vs development budget

In any situation of an economic crunch, it is the development budget that faces the axe. This happened under all previous governments and it is happening now. The present government inherited the economy in a bad shape, characterized by high fiscal and current account deficits. The additional burdens were the high level of debt servicing due to the huge amount of foreign and domestic loans, contracted by the previous government. In the given circumstances, there was no way out but to cut corners and reduce expenses, wherever possible.

The first thing the government did was to go into an austerity mode. All unnecessary government expenditures were eliminated with the Prime Minister setting an example himself. He moved from the Prime Minister’s House to a three-bedroom house. All luxury cars and vehicles were auctioned and the hospitality menu too was cut to the bare minimum.

But this was not enough because of the unremitting revenue shortfall. According to the FBR,

the government has faced a revenue shortfall of Rs237 billion in the first eight months of the current fiscal year as the collection stood at Rs2328 billion against the assigned target of Rs2565 billion. This has created doubts whether the FBR will be able to achieve the annual tax collection target of Rs4398 billion for the current fiscal year 2018-19.

In the view of economic experts, the FBR is heading towards a revenue shortfall in the range of Rs300 to Rs350 billion for the whole financial year. With this massive shortfall, the overall budget deficit target under the present government may touch the highest ever absolute figure of 7 percent of the GDP in the country’s history.

Tax collection fell short of target because of incentives provided by the last regime for salaried class as the taxable limit was increased from Rs0.4 million to Rs1.2 million per annum, massive reduction in utilization of Public Sector Development Program (PSDP), suspension of the withholding tax on mobile phone usage and keeping the sales tax on petroleum products at a lower side.

With tax collection in a downward spiral, the axe has fallen on the Public Sector Development Programme budget. According to the latest Planning Commission figures, the PSDP expenditure amounted to about Rs291 billion as of February 1, 2019. It means the government has consumed 43 percent of the total revised budget of Rs675 billion in the first seven months of the current fiscal year. But the good thing is that this is not too far below the average of 45 percent PSDP utilization recorded in the comparable period during FY16 to FY18 under the PML-N.

Since the present government is committed to speedy economic growth and welfare of the people, it is expected that the remainder of the PSDP budget (Rs384 bn) will be spent in the five remaining months. As per available figures, funds over Rs65 billion were released in January alone. If the spending goes on at this pace, the entire development budget may be released by the end of June. It will be a great accomplishment on the part of the government.

But there are hurdles to the way which the government will have to remove if it aims to accomplish the task. Given the shortfall in domestic revenue collection, the government has been depensing on foreign assistance to achieve its development goals. It may be added that the revised PSDP announced alongside the September 2018 mini-budget had shown Rs144 billion under foreign assistance which constitutes 21 percent of the Rs675 billion PSDP budget. In the first seven months, however, the foreign assistance has amounted to Rs121 billion. That is almost 84 percent of the committed foreign assistance coming in already, contributing to 42 percent to the PSDP releases thus far.

Significantly, the foreign money has been mainly concentrated in the National Highway Authority (NHA) projects (71%), followed by NTDC/Pepco (11%), Suparco (8%), and Wapda – water division (5%). As usual, China is leading the pack on foreign financing of PSDP. The data from the Economic Affairs Division, for 1HFY19, put incoming proceeds from Chinese project loans at Rs82.86 billion – most of which go to federal projects. Out of that, major funding came for CPEC highway and motorway projects, Orange Line project, and a Remote-sensing satellite (Suparco). Following China was the ADB, which channeled the government close to Rs45 billion in 1HFY19, under transport, connectivity, energy and social projects.

With five months still left, it is hoped in government quarters that foreign assistance will continue to pour in increasing numbers. Pakistan’s foreign policy initiatives are bearing results and more soft loans and grants are expected from China and brotherly Muslim countries. And, as planned, an IMF programme gets under way the country will be able to attract financial inflows from a variety of sources.

But we should not solely depend on foreign assistance to meet our development needs. The CPEC is a big window of opportunity for foreign investment and it should be fully utilized. But at the same time, the government should redouble its efforts to raise revenue internally for which there is tremendous potential. This is a challenge to the country’s economic managers which they must accept.