Article by: Mehtab Haider
Amid rising political temperatures against the backdrop of Pakistan Democratic Movement’s campaign to oust Prime Minister Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) led government, the risks to Pakistan’s beleaguered economy are multiplying even as Islamabad makes a last-ditch effort to revive the IMF’s stalled $6 billion programs.
The PDM has announced its plans to hold a long march towards Islamabad and collectively quit the National and Provincial Assemblies, triggering a full-fledged political crisis around the New Year 2021.
Pakistan’s economy has been in crisis mode for some time because of the large current account and budget deficits. There is a need to seriously analyze these two deficits in detail to ascertain their nature and take corrective action.
The PTI government, however, has resorted to chest-thumping with a deafening chorus of turning the current account deficit into a surplus, all the while ignoring worrying developments on the macroeconomic front that are deepening the crisis with the passing of each month.
The Current Account Deficit (CAD) that had ballooned to $20 billion two years ago turned into surplus four months into the current financial year. The reasons behind this change were a sharp drop in imports due to the economic slowdown and remittances from expatriate workers.
However, there are some major risks arising out of the situation. International POL prices are on the upswing with Brent prices rising by ten dollars a barrel. This could cause Pakistan’s petroleum import bill for the year to surge by $1.5 billion.
Secondly, Pakistan is set to import around 7 to 8 million bales of cotton, 2.5 million tons of wheat, and vast quantities of sugar. Together, these could push the country’s import bill upwards by approximately $4 billion.
Thirdly, the outflows on payment of principal and mark-up of foreign loans continued at a time when Islamabad had exhausted its program loans from the World Bank and Asian Development Bank, and project loans had dried up. All these developments could accelerate pressures and the government’s much-touted current account surplus could be turned into a deficit by the end of the fiscal year.
The capital account was already in red in the first four months (July-Oct) of the current fiscal year – a worrisome symptom that portends a full-blown crisis within the next few months.
The yawning budget deficit – the gap between revenues and expenditures – climbed to PKR 900 billion or 2 percent of the GDP (Gross Domestic Product) during the first four months (July-Oct) of the current fiscal year.
This clearly shows that the expenditures were increasing at a supersonic speed while FBR’s revenues showed a growth of just 4.5 percent in first four months of the current fiscal year.
Take a closer look at FBR’s revenue collection, it becomes clear that the tax collection only achieved growth of 3.8 percent in the first five months. On the non-tax revenue front, the profits of SBP dropped so overall tax and non-tax collection could not be increased at the desired pace.
The government had envisaged a target budget deficit of PKR 3,195 billion or 7 percent of the GDP for the financial year 2020-21. In view of the performance of the first four months, it is amply clear we are headed for a much higher budget deficit. This fiscal imbalance cannot fail to pose a major threat to the economy.
The FBR collected PKR 1,688 billion in the first five months (July-November) of the current fiscal year against PKR 1,623 billion in the same period of the last fiscal year, registering net growth of just 3.8 percent.
The FBR envisaged an annual tax collection target of PKR 4,963 billion for the whole financial year 2020-21 against tax collection of PKR 3,997 billion for the fiscal year 2019-20. This means the FBR needs to achieve around 20 percent growth in order to realize its tax collection target by 30 June 2021.
At the current pace, it seems that the FBR would be able to touch PKR 2,000 billion marks by the end of December, rounding out the first half of the current fiscal year. It would then be left with the task of collecting PKR 3000 billion in the second half (Jan-June) of the fiscal year. On average, the FBR will be required to collect PKR 500 billion every month.
It is usual for the FBR to set higher targets for the last quarter (April-June) every fiscal year.
The IMF has so far estimated that the FBR requires additional revenue measures to the tune of PKR 250 to 300 billion to achieve its tax collection target of PKR 4,963 billion. The revival of the IMF program will depend upon the government’s ability to come up with additional revenue measures through a new finance bill or presidential ordinance in the coming months.
However, in a worrying development, the FBR missed its monthly revenue collection target consecutively for the last three months. Clearly, as the year progresses, it is becoming more and more difficult for the tax machinery to achieve the annual target of PKR 4,963 billion.
With expenditures on the rise and revenue growth sluggish, the economists are suggesting that the budget deficit might escalate beyond 8.5 percent to 9 percent of GDP for the current fiscal year.
So far, the primary balance excluding mark-up obligations demon- strates movement in the right direction but worsening fiscal position in months ahead could easily turn this dream into a night- mare.
Another risk to the economy stems from the severity of the second wave of the COVID-19 pandemic, which could cause inflation to jump, especially on account of food supply disruptions.
The government would do well to focus on avoiding the inflation- ary shock because all economists agree that for things to take a turn for the better, the CPI inflation must ease with passing of every week and month.
Special Secretary to Ministry of Finance Kamran Afzal who is also the official spokesman, when contacted, brushed aside all these challenges, saying that the government was focused on convincing the IMF to hold review talks soon with a view to reviving the $6 billion program.
Planning in the middle of the COVID-19 outbreak, the FBR had distributed its target on the lower side for the first half (July-Dec) period on the basis of the assumption that economic activity would return to normal in the second half (Jan-June) of the year. Unfortunately, however, the pandemic has returned with a vengeance to wreak fresh havoc on the economy.