Monetary measures unveiled by the mini budget suggest that the government did not do its homework and, by and large, it intends to continue the policies of previous government. Instead of bringing any new sector or class of people in the tax net, the government has increased the burden on the existing taxpayers. It did not scale back non-development expenditures but has cut the development budget, which will pull down the economic growth rate to a level that will not be sufficient to absorb new entrants in the job market. Asia Development Bank has estimated 4.8 percent growth for the current fiscal against last governments’ projection of 6.2. Despite trumped up austerity drive, the cost of running the civilian government has been reduced by only Rs3 billion.
Nonetheless, government’s measures of financial discipline stand unfolded. Some real, some symbolic; put together they indicate a tough spell for a common man. Finance minister said these are only emergency measures and the economic reforms will be introduced in coming weeks. He described “increasing employment, enhancing economic stability and supporting exports” as top priorities of his government. These ‘emergency’ measures lack the conceptual shift that is needed to document the growing informal economy and increase economic growth to create more jobs.
The proposed Rs1.9 trillion (5.1 percent of Gross Domestic Product (GDP) budget deficit target is Rs89 billion higher than the original budget deficit target. The finance minister said if no measures were taken the budget deficit could shoot up to Rs2.9 trillion (7.2 percent of GDP). That is the budget volume could have gone up to Rs6.1 trillion by end of fiscal year as against Rs5.246 trillion projected in the main budget. However, despite Rs814 billion fiscal adjustment, the revised size of the budget will be Rs5.3 trillion; Rs63 billion or 1.2 percent higher than the original budget for this fiscal year. This is because the government has increased the current expenditures budget to Rs4.4 trillion (an increase of Rs234 billion or 5.6 percent of the original budget of this fiscal).
Government has lowered the annual tax collection target to Rs4.4 trillion, deviating from its pre-election promise of increasing revenue collection and reducing reliance on indirect taxes. The Rs4.398-trillion target is only 14.4 percent higher than the collection of Rs3.841 trillion in the previous fiscal year. New government PTI had promised to increase revenue collection to Rs8 trillion. To achieve this, first year target should have been at least 20 percent higher.
Effects, which have begun showing up are not due to trickle down of reforms, but due resource squeeze. Worst hit is Public Sector Development Programme. Nearly 450 schemes, costing 1.6 trillion rupees, which were in the pre-approval stage, have been dropped. Government has decided to release Rs4.5 billion for construction of 8,276 housing units for labourers. Employees Old Age Benefit Institute (EOBI) pensions have been upped by 10 percent. And 52 item categories of medical instruments and equipment from sales tax. Earlier decision to increase petroleum levy by three fold to Rs30 per litre has also been withdrawn. This will result into Rs110 billion cut in non-tax revenue estimates. Government has lowered the cost of doing business by providing Rs44 billion relief to the five export oriented sectors.
Pakistan’s current account deficit (CAD), caused by higher expenditures in foreign currencies than the earnings, has begun to decline. It narrowed down by $600 million in August 2018 compared to the previous month because of a notable drop in imports. It stood at $2.12 billion in the previous month of July. Imports slowed down 19 percent to $4.47 billion compared to $5.49 billion in July.
Two main pillars of economy agriculture and textile industry have been given added incentives. Textile that accounts for 60 percent of net exports is thrilled on a massive cut in input costs. The cut in duty on 82 items would give a benefit of Rs5 billion to the textile industry in remaining months of the current fiscal year 2018-19. Moreover sector would get gas supply on subsidised rates. This is in addition to the Rs44-billion benefits the industry is being provided through gas subsidy to make the utility price uniform across the country. Textile sector is hopeful of doubling the exports within five years. Government has also promised to reduce electricity tariff for the industry to the regional competitive level. Agriculture got support prices upped alongside multi-billion subsidy in fertilizer and gas.
Finance Supplementary (Amendment) Bill 2018 has continued the tax measures of previous regime. However, some of the efforts to document the informal economy stand reversed, at least for the time being. More innovative measures need to be thought about rather than axing own feet. This is all the more important as country is struggling to get out of the Financial Action Task Force (FATF) grey listing.
The government also increased the sales tax on RLNG supply to all the sectors to the standard 17 percent. The reduced 12 percent tax will now be available only on supplies of RLNG/LNG to gas transmission and distribution companies. This will increase the cost of cement, fertiliser and CNG production. Gas tariff has been upped up to 143 percent in one go, one hopes that its comprehensive impact has been calculated. The regulatory duties have also been increased or levied on 612 tariff lines. While tax revenues target is down by Rs169 billion to Rs4.72 trillion non-tax revenue estimate has increased by Rs121 billion to Rs893 billion. The government’s net revenue receipts have been projected at almost original budget target level of Rs3.04 trillion after transfer of Rs2.6 trillion to provinces as their shares in federal taxes. This has left the government with an overall budget deficit of Rs1.9 trillion or 5.1 percent of the GDP against IMF guideline of 4 percent.
Mini budget indicates that government is in a “go, no go” state with regard to availing IMF bailout package, however, it has a responsibility towards protecting general public against undue economic hardship. Hopefully, the good sense would prevail, and financial matter would be handled in a professional manner.