Economic strangulation

Mohamad Ishaq Dar reviews the latest budget presented by the PTI government

Economic strangulation
The PTI government has presented the second federal budget for fiscal year 2020-21 (FY21), but it is in fact their fourth with two supplementary budgets since they took office. Unfortunately, in the current FY20, the government has failed to achieve all major economic targets as was the case in FY19. Keeping in view the grounding of the economy in the last two years with negative GDP growth after 68 years, one would have hoped that the budget would contain pro-growth measures. There appear to be none. Overall, it appears to be a directionless budget. The government has claimed that the budget is pro-poor, but this, too, is a false claim as it has announced no increase for salaries and pensions for FY21 for government employees after shameless surrender to dictations of foreign lenders. The priorities of the government are visible in the budget FY21, reducing allocations for social sectors including education, and increasing for National Accountability Bureau, Federal Investigation Agency and IB.

At a time when countries all over the world are fighting the Covid-19 pandemic with unprecedented economic support to its citizens and businesses, the PTI government has announced an austerity budget to ensure that its economy and people would continue to suffer both Covid devastation, and economic strangulation.
This government has created new traditions in economic management

Economy in a tailspin

Before Covid-19 surfaced in Pakistan, the economy was already in a recession wrought by insensitive hikes in the interest rate (from 6.25 percent to 13.25 percent) and massive devaluation of rupee/$ (from Rs115 to Rs165). The combined effect of these two policies, coupled with heavy increase in import duties, was an unprecedented drop in imports, significant fall in domestic production, closure of businesses, jobs redundancies and runaway double-digit inflation.

The GDP growth for FY20 has recently been revised from positive four percent to negative 0.38 percent and the GDP for FY19 reduced from 3.3 percent to 1.9 percent. Thus, for two consecutive years, there is no increase in per capita income because the population growth rate is over two percent which is higher than the GDP growth in these two years.

The size of GDP has come down from $315 billion in FY18 to $264 billion in FY20, a loss of $51 billion. As a result, per capita income - which increased in PML-N’s tenure by 24 percent to $1652 in FY18 - has declined by 18 percent to $1355 in FY20, a drop of $297 in the last two years. This is not an enviable performance.

Covid-19 and government support

While the economy was already in serious danger, the coronavirus pandemic has worsened economic trends. Government intervention to reduce its severe adverse effects on people and economy has been ineffective. The package of Rs1,200 billion announced by the government was an eyewash. Regrettably, it counted the existing allocations (such as Rs280 billion for wheat procurement, Rs100 billion of exporters overdue refunds and Rs190 billion for the Ehsas program) in the budget to the extent of around Rs600 billion; of the remaining balance of Rs600 billion, only Rs230 billion have been spent so far beyond the already existing allocations and balance amount seems to be kept for the budget FY21.

The Covid-19 related spending in Pakistan so far is less than one percent of its GDP. Countries like USA, UK, India, Bangladesh and South Africa have all announced packages to rescue their people and economies equivalent to as much as 10 percent of their GDPs.

Instead, the government has prematurely lifted the half-heartedly imposed lockdown and washed its hands off the problem. It has resulted in a surge of infections which is devastating for the people and the economy; the government is content with mere sermons of SOPs, strict compliance, and what not. However, it cannot escape from taking the responsibility of mishandling the Covid-19 pandemic and causing huge loss to the life and businesses of the people.

Tax-free budget is a lie

The government has claimed that in the budget FY21, no new tax has been imposed. This is a ridiculous claim which is nothing more than a white lie. The most significant tax target is that of petroleum levy (PL) which is budgeted for FY21 at Rs450 billion, from Rs260 billion during current year, an increase of 73 perent. PMLN’s last FY18 had realised PL of Rs179 billion. PTI leaders used to make big hue and cry with naming PL an oppressive taxation on petroleum products. Now it seems that the PTI’s main item to mobilise revenue is through PL which is budgeted to yield an unprecedented amount of Rs450 billion, that is 251 percent higher than PMLN’s. Maybe now PL deserves to be called oppressive taxation.

Unrealistic targets

The budget has set FBR tax revenue target of Rs4,963 billion, which is 27 percent higher than the revised target of Rs3,908 billion for current FY20. Keeping in mind the projected GDP growth target of 2.1 percent and inflation at six percent, the nominal GDP growth would be 8.1 percent. Assuming tax elasticity to GDP of 1, the growth in FBR tax revenues would be 8.1 percent or Rs317 billion, which would take the total to Rs4,225 billion, which is Rs738 billion short of the budget target. Where would those taxes come from? As per media reports from June 13, the government has imposed new taxes of Rs200 billion and this report hasn’t been negated by the authorities.

This government has created new traditions in economic management. Every budget discloses the extent of discretionary tax effort and a chart is given of negative and positive impact of each tax measure. Breaking this budgetary tradition, the government has decided not to disclose this information to the parliament. Unfortunately, ministers don’t hesitate when making false statements on the floor of the parliament; last year, a minister who presented the budget said on record that taxes worth Rs500 billion were imposed which subsequently turned out to be Rs735 billion as revealed in the staff report of the IMF. Be that as it may, the tax collection target is unrealistic in an economy that is railing under the coronavirus attack.

Employment and poverty

Unemployment rate of 5.8 percent in FY18 has risen by 47 percent to 8.5 percent by FY20 and expected to rise around 10 percent in FY21. Contrary to its numerous promises, the government has recently terminated jobs of nearly 10,000 employees of Pakistan Steel Mills (PSM). This is the most heartless decision of PM Imran Niazi who recently said that his government would not impose a lockdown because the workers would lose jobs. The PTI has forgotten that the PML-N tried to reform and restructure PSM and PIA in 2016 without any plan to lay-off a single employee in both organisations. But Mr Imran Niazi and Asad Umer played bad politics by staging rallies in Karachi against such a plan and sponsored strikes which ended with a few deaths of innocent people.

The PML-N managed in its tenure to reduce poverty by six percent as per a World Bank report, but in last two years there has been a five percent increase in the number of people living below poverty line.

Fiscal deficit and public debt

In its two fiscal years, PTI govt has increased budget deficit from Rs. 2260 billion to Rs. 3916 billion or from 6.6% of GDP to 9.1%, main reason for such escalation is it’s failure to enhance taxes revenue which ended at Rs. 3908 billion in FY20 from Rs. 3842 billion (PMLN’s) and on the other hand its inability to control the current account expenditure which rose from Rs. 4704 billion (PMLN) to Rs. 6372 billion in FY20. Budgeted fiscal deficit for FY21 is 7% of GDP, same as last FY20 but this already has ended at 9.1% and is more likely to exceed 9.5% finally. Many expenditures for FY21 have been budgeted unrealistically – interest payments, defence, pensions, civil administration and grants – are all shown to be close to last year level, which is an untenable assumption given the double-digit inflation that has taken place so far.

PM Imran Niazi pledged to the nation to reduce the public debt by Rs.10 trillion, which stood at Rs.24.9 trillion at close of FY18. In reality the debt in first two years of PTI government has increased by 41% to Rs.35.2 trillion. Debt and Liabilities figures reveal an increase of 43% from Rs. 30 trillion to Rs. 43 trillion in same period. Fiscal deficit for FY21 has been projected to be Rs. 4963 billion which will add to the public debt unless financed through some ‘handsome’ donations.

Unfortunately, ill-conceived and flawed economic policies, coupled with an incompetent government and mismanagement of the economy has landed the nation in a serious situation and budget FY21 gives no hope of recovery in the near future. The government has projected GDP growth of 2.1 percent for FY21 (against World Bank’s negative 0.2 percent) which means per capita income will continue to decline in PTI’s third year in view of the population growth rate of 2.4 percent. There is no-out-of-the-box thinking that has guided this budget’s making and it seems that the house of economic team is in a serious disarray.

Perhaps it is unwise to expect from the PTI government to have done anything differently. This is a bunch of rabble-rousers who have not yet left the street politics and would remain busy in the same rhetoric of ‘previous governments’ and now added with ‘coronavirus’, without caring for the plight of the masses which are suffering due to the nose-diving economy.

The author is former finance minister of Pakistan and fellow member of the Institute of Chartered Accountants in England and Wales

The author, a UK fellow chartered accountant, is a former finance minister of Pakistan and former leader of opposition in the Senate of Pakistan