Asrar Raouf surveys the complicated economic scenario
Pakistan is in the grip of intense and deeply & difficult economic times as all indicators are pointing towards a downward trend that is not going to be easily reversed. The situation has reached a pass where just blaming the previous government would not do as there are profound structural flaws in Pakistani economic setup that have not been addressed by successive governments. Unfortunately many economic managers in the past have deliberately avoided tackling such problems paying scant regard to the fact that unresolved economic issues have a tendency to mushroom into large existential crises. The current malaise is the ultimate outcome of years of neglect, both willing and unwilling, on part of the official segment managing the national economy. Instead of equating Pakistan’s economy with Asian tigers now it is equated with Sri Lanka that is now rated as a recognised economic failure. The Pakistani economic failure is ranged across all sectors of economy irrespective of their size or output.
The most worrying aspect of the current economic crisis Pakistan finds itself in is the inevitability of remaining engaged with the IMF that once was vilified by all credible circles dealing with economy. The problem in this respect is obvious simply because IMF insists on increasing revenue that has become the bane of Pakistani taxation machinery that has consistently shown its inability to achieve higher revenue raising targets. Expecting the FBR to meet the now reportedly demanded revenue collection target of Rs.7.25 trillion in the coming fiscal year would be extremely difficult task as it will entail imposition of additional taxes of around Rs.300 billion, including withdrawal of agriculture tax exemptions and increase in burden on the salaried class. The Rs.7.25 trillion tax collection target will be Rs.1.15 trillion, or 19%, higher than this year’s revised target of Rs.6.tn that is still witnessing significant shortfalls due to import compression. The reportedly proposed target is nearly Rs.350 billion higher than what tax authorities believe can be generated in fiscal year 2022-23 without imposing new taxes.
The essential problem the tax collectors will face is to increase taxation levels of salaried class that may bring in a storm of protestation. Any rationalisation of tax slabs will almost double the tax burden on the middle and upper middle-income groups despite assurance given to the contrary. IMF is emphasising clearly the need to remove exemptions to include fertilisers and tractors, which constitute 23% of the current GST expenditure and whose removal was under consideration as a 2023 budget measure though under the circumstances it would be cumbersome measure to adopt as it would negatively affect the crucial agricultural sector that already is experiencing difficulties owing to less-than-expected yields of important crops like wheat.
Moreover, the FBR’s performance has remained largely dependent on imports that contributed nearly 52% to the total tax collection, which camouflaged the weaknesses in the domestic sales tax collection that remained negative. This is certainly not a healthy phenomenon and is causing widespread jitters in official economic circles. It is already evident that the FBR has collected Rs.4.86 trillion in taxes during the first 10 months of current fiscal year, leaving itself with a task to collect another Rs.1.24 trillion in just two months at an average of Rs.20.4 billion a day during May and June to achieve the target and this is a very improbable possibility.
It must be kept in view that the finance ministry is projecting 9.5% inflation and 5.5% economic growth for fiscal year 2022-23, which could increase the revenue collection by around Rs.900bn in the next fiscal year without resorting to additional revenue measures yet the FBR opines that the way out is to rely on the nominal GDP growth rate of around 15% and making efforts for additional Rs.200 billion revenue collection through administrative measures. However, there is one proviso in the narrative and that pertains to the fact that the IMF never accepts the administrative measures as a solid strategy to achieve the target. Though official economists talk about increase in tax collection proportionate to the nominal GDP growth rate, the FBRs’ performance in the last 10 months suggest that its sales tax collection at the domestic stage fell by 10% despite average inflation rate of 11%.
In a curious twist the Pak-IMF talks are scheduled to be held in, of all the places, Doha, evoking similarities with US-Taliban talks some time before. The talks are clouded by the reality of Pakistan unable to immediately obtain major financial succour from its three friendly countries that seriously limited Pakistan’s options to avoid financial insolvency. This is precisely the reason that Pakistan has agreed to fulfill pre-negotiations condition laid down by the IMF of withdrawing fuel subsidies from 15 May of this fiscal year. It is reported that PMLN leadership based in London is extremely reluctant to increase fuel prices compelling PM Shehbaz Sharif to once again ask the IMF to partially relax its condition of increasing fuel prices. He is constrained to do so as his coalition strongly abhors such a measure as it will result as deep dent in their acceptability and may cause tremendous damage to their popularity.
Interestingly the new government is now fated to complain about the excessive subsidies it has to provide to cover the cost of providing cheap fuel to people as just a month before they were furiously criticising the previous government for not giving relief to people by giving subsidies to keep fuel prices within the reach of the common man. They now repeatedly point out that currently the government is giving Rs.29 per litre subsidy on petrol and Rs.73 on high speed diesel – which both the finance ministry and the IMF want to reverse. The previous PTI government had laid landmines as it not only gave these subsidies but provided wrong estimates of the cost. However, the economic managers are clueless about how to face the backlash on the political front. There are proposals under consideration to hike the POL prices in a gradual manner and also convince the provinces to share the fiscal burden at difficult times.
Additional pressure on the economic situation is the state of country’s external finances that is precarious as it is left with only $10.5 billion gross official foreign exchange reserves while its monthly import bill was $6.6 billion in April. It is important to keep in view that the former State Bank of Pakistan governor Dr. Reza Baqir pumped billions of dollars in the exchange market to defend the weakening rupee but ended up losing the precious reserves that also badly hit the current account deficit. Now the worry is the delay in finalisation of new loan deals with Saudi Arabia, China and the United Arab Emirates. Pakistan is awaiting a rollover of $2.3 billion Chinese commercial loan with another $1 billion Chinese deposit is maturing this and the next month. China has now placed a condition for the renewal of its $2.3 billion loan which Pakistan returned in March on the hope of getting it back in April but still remains undisbursed as China wants its loans to be exclusively treated as part of the reserves. On top of all of this is the deepening political uncertainty that has created doubts about the ability of the new political dispensation to improve the situation. TW