KARACHI: As Pakistan’s federal government plans another mini-budget to counter its fiscal deficit, financial experts expect a further cut in the provinces’ share from the federal resources’ divisible pool once the structural measures are in place.
Last month, Finance Minister Asad Umar had hinted at the possibility of another mini-budget being presented in parliament, in January 2019, reasoning that the “fiscal deficit at the current level was not sustainable.”
He had told members of the Senate’s Standing Committee on Finance and Revenue that a proposal to increase taxes and tariffs was in place but that no final decision had been taken yet.
Fitch Solutions, in a report released on Monday, projected Pakistan’s budget deficit was six percent in the current financial year FY 19, compared to 5.8 percent in the last fiscal year FY18.
“The mini-budget is necessitated as revenue collection growth is just 3.5 percent which is far below the nominal growth in the GDP and taking into account the inflation rate. This means that if additional measures are not taken, the government will not be in a position to curtail the fiscal deficit to 4.5 percent of the GDP, which is the revised target for FY2018-19. It would lead to more borrowing and enhanced debt servicing,” Dr Ikram ul Haq, an expert on economic and taxation matters, told Arab News.
The federal government is expected to introduce structural changes in addition to measures to enhance revenue collection. “They are expected to alter the structure so that the revenue share of provinces from federal could be reduced because the payment to provinces is one of the reasons for the fiscal deficit of the federal government,” Muzzamil Aslam, a senior economist, said.
He added: “The government is expected to change federal levy structure because the levy is not sharable while sales taxes are shared with provinces. You have seen in case of petroleum price announced for January 2019 they have increased PDL (Petroleum Development Levy)”.
“Restoration of tax on prepaid phone cards and enhanced duty on luxury imports may be one of the other actions,” he said.
Aslam also believes that the government may come up with a changed formula for oil prices’ mechanism in the mini-budget.
The federal government is also pushing the country’s exports and discoursing imports. “Government may take measures to fix the problems which the country’s exports are facing including tariff, duties and rebate issues. Import of raw material for exportable goods may be duty-free,” Dr. Abid Qaiyum Suleri, member of the EAC told Arab News adding that “there would be a positive change”.
The government is taking steps which are contrary to its pre-election promises including borrowing to finance the fiscal deficit which has increased by 10 percent since June 2018. “The government inherited a vulnerable economy that was living from loan-to-loan. They may have talked about breaking out of this debt-trap during the campaign, but this is not possible without disrupting the day-to-day functioning of the economy. So I would not blame them for the compulsion to borrow,” Dr. Mushtaq Khan, a senior economist, told Arab News.
However, experts believe that the failure to reform the Federal Board of Revenue (FBR) has led to the deficit. “The government has failed to take administrative reforms in FBR and remove all exemptions and waivers and induce growth through lower taxes. Unless these measures are taken, the fiscal deficit will not reduce,” Dr. Ikram ul Haq, another economist, said.
“The second area is the reduction of unproductive expenses to the extent of at least of 50 percent. Instead of doing that, the government has cut the development expenditure which is lowering the GDP growth. Without growth of seven percent, we cannot increase taxes and generate more jobs,” Dr. Haq added.
Dr. Mushtaq Khan suggested that the government “should provide a vision of what it seeks to achieve”.
“I think this government has the opportunity to formulate a sound industrial and trade policy that builds upon CPEC. Only this will create jobs, upgrade Pakistan’s labor force, and generate the fiscal space needed for social spending. To make all this possible, the government must remain firm in its determination to document all economic/financial transactions despite the likely resistance,” he said.
The administration’s lack of clarity over whether or not it will approach the International Monetary Fund (IMF) for a bailout program is also fueling uncertainty which needs to be clarified. “The economy is looking for clarity, the most important being the start of the IMF stabilization program. The debate of whether or not to go to the IMF is a misinformed discussion,” Dr. Khan added.
If presented, it will be the government’s second mini-budget after Prime Minister Imran Khan assumed office in August last year. The first was presented in September.