Financial situation still dire

ByAsrar Raouf

Former Civil Servent


June 4, 2022

Asrar Raouf brings to fore the prevalent financial realities

The Financial situation still dire noose around the neck of the Pakistani people has tightened further as the government increased the petrol prices by Rs.60 per litre in two spurts of activity bringing the price to Rs.209 per litre. This price level is near the price demanded by the IMF of Rs.245 per litre and may well be brought to this level in the incoming budget. On the other hand, the rupee maintained its upward drive and gained another 59 paisas against the US dollar in the interbank market. The local currency has recovered Rs.4.14 in the last four sessions after hitting an all-time low at Rs.202.01 on 26 May and is now valued at Rs.197.87.

As the financial year is coming to close it appears that the FBR has picked up its tax collection efforts and in the process has come near the revised target of tax collection set for 2021-22. This augurs well for the economic health of the country that its primary tax collection entity has changed gears and is now doing whatever it could do to meet the revenue targets. Though it is not anticipated that the FBR would fulfill the laid down target in toto and there may likely be a shortfall but it is strongly suggested that the shortfall may not be large or significant. It could be seen that the FBR is inching towards achieving appropriate levels of tax collection that may prove to grant some kind of financial viability to the country that would prove to be very welcome.

It is lately reported that the FBR has collected Rs.490 billion in May 2022 against monthly target of Rs.511 billion, registering a shortfall of Rs.21 billion. This leaves the FBR to collect Rs.751 billion in June, the last month of the fiscal year to take the target up to Rs.6,100 billion at the end of the fiscal year. It is reliably reported that the FBR may be able to collect another Rs.650 billion June that would actually register a shortfall of something between Rs.100 to Rs.150 billion. Accordingly the FBR has disclosed that the provisional figures reported will further improve after closure of payment receipts and reconciliation with State Bank of Pakistan. It also mentioned that the current tax collection figures register a growth of about 28.4 per cent over the collection of Rs.4,164 billion during the same period in last fiscal year.

The FBR is of the opinion that the tax collection reveals a growth trajectory despite massive tax relief given by the government on various essential items to the people and in this respect cited that this is the first time ever that sales tax on all POL products has been reduced to zero that has ultimately cost Rs.45 billion to the FBR collection in just May alone. FBR has also pointed out that it has brought about many innovative interventions both at policy and operational level with a view to maximise revenue potential through digitisation, transparency, and taxpayers’ facilitation. FBR added that these initiatives have not only resulted in ensuring transparency, taxpayers’ facilitation, and the ease of doing business but also translated in a healthy and steady growth in revenue collection.

The current state of the economic affairs has shifted the onus of responsibility towards the incumbent coalition dispensation that is now confronted by the dual challenge of restoring Pakistan’s credibility in the eyes of international lenders due to the broken past promises on one hand and simultaneously winning concessions from them, on the other. However, with the latest revenue collection figures in hand the government approached the IMF pitching the budget deficit target of 4.8 per cent for the economy that comes to Rs.3.77 trillion that would obviously be expected by the IMF to adjust through a combination of expenditure cuts and additional revenue mobilisation. The primary deficit target, excluding interest payments, had been proposed at 0.5% of GDP, or less than Rs.400 billion, for the next fiscal year. Pakistan also informed the IMF that any budget made on the assumption of achieving the primary budget balance would be unrealistic and would result in starting the new fiscal year on a wrong footing.

It was quite obvious, too, to expect that the IMF would concur with this proposal and accordingly the IMF did not accept both the numbers, terming the 4.8% budget deficit projection at the lower end in the absence of concrete measures. It demanded that Pakistan should meet its commitment and generate a primary budget surplus instead of proposing the primary deficit target. It is very well known that the key goal IMF is pursuing since embarking upon its 2019 Extended Fund Facility (EFF) is the primary budget target that it expects to be achieved through a combination of development expenditure cuts and enhancing revenue collection. In this context it is also pointed out that the increase in revenue collection followed by cuts in development spending have been canceled out by the increase in the interest rate recently announced by the State Bank of Pakistan that now stands at 13.75%.

The crux of the matter currently is that Pakistan and the IMF have so far held two unsuccessful rounds of talks to reach agreement on the completion of the 7th review. The main hurdle in arriving at an agreement is increase in electricity prices and the subsidies needed to bridge the gap. In this context it is mentioned that the financial authorities are prepared to provide Rs.740 billion in electricity subsidies for the next fiscal year and this amount is Rs.110 billion higher than this fiscal year. The crunch here is that bridging this gap completely would entail increasing electricity prices to Rs.10 to Rs.12 per unit, including withdrawal of the temporary Rs.5 per unit subsidy announced by the last PTI government for four months. This would certainly be unacceptable to the IMF and is causing delay in reaching an agreement.

It is important to take into account the guarded response of the IMF that couches its words in technical terms by stating that it expects Pakistan needs to take wide-ranging steps to repair macroeconomic stability indicating that the revival of the programme would not be an easy ride despite the government’s decision to increase fuel prices by 25%. The IMF singled out the withdrawal of fuel and energy subsidies and the fiscal year 2022-23 budget as areas that need to be addressed for repairing the damaged economy and achieving the EFF programme objectives. In this respect IMF is asking for immediate withdrawal of Rs.5 per unit electricity subsidy that was brought about by the former PM that many regard as part of the mine-laying process his dispensation engaged in before it was voted out of office.

The bureaucratic circles dealing with this issue are trying to find a way out for the tariff issue and have suggested fixing the uniform gas tariffs of around Rs.2,100 per mmbtu by bringing the rates of south and north regions at par and is putting forward this step to ensure the financial viability of the Sui Southern Gas Company Limited and the Sui Northern Gas Pipelines Limited. In this respect it was pointed out that the southern region gets the indigenous gas that is cheaper while the north zone’s requirements are mostly met through imports requiring huge subsidies. This proposal however did not vibe well with the political leadership of the coalition government that does not want to bear the brunt of taking another unpopular decision. TW


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