Talking business

The government needs to set realistic revenue targets and then meet them.

There is only one number that needs to be announced on Friday when the Finance Minister “unveils” the budget. And that is the revenue target they are setting for the next year. All other questions follow automatically from this.

The big question is where will the money come from to attain this target? Last year the FBR revenue target was set at 1.667 trillion rupees, and almost immediately the International Monetary Fund expressed its disbelief. Then came the State Bank with this: “Containing the fiscal deficit within the announced target of 4% of GDP for FY11 already seems challenging.”

The revenue numbers announced in the budget in June, already seemed challenging to the State Bank in July. By now everybody knew that the government had announced a fictitious budget, with revenue targets it would never be able to meet. Everybody, except the government that is.

Then came the collapsing market confidence. The first time the government ventured to the money markets to raise funds in longer tenors, the market demanded premiums so large that government baulked.

The second approach had the same effect. Yields on T bills spiked long before the floods, and over the course of the fiscal year, they have risen by 100 to 150 basis points depending on tenor. The revenue numbers were revised eventually, a fact that seemed inevitable from the very get go, but made even more inevitable by the floods. In December the FBR revenue collection target was revised down by 60 billion rupees, and revised further down to another 19 billion in March of this year. Two downward revisions in one year equals not enough homework at the outset.

So is the Finance Minister getting ready to announce yet another fictitious budget on Friday? And that assumes no further delays in the date!  All indications thus far are that this is indeed another fictitious budget coming our way. Take the revenue target for starters, which is now public knowledge.

The government is setting an FBR revenue target of 1,952 billion rupees. This year, the revised target is 1,588 billion, and the government’s own Revenue Advisory Council is on record saying that “we’ll be lucky if we get to 1,530 billion.” Never mind the target announced in last year’s budget speech, we clearly made this whole thing up as we went.

So a target of 1,952 billion means an additional 364 billion rupees of revenue they intend to pull out of their hat beyond the downward revised target of this year.  Where will this money come from? Some of it is expected to come from “natural growth” via inflation and some semblance of industrial revival.  Some of it is expected to come from new revenue measures such as the ones announced in March. Some from harmonising the rate of Sales Tax on export sectors identified in SRO 283 at 5 percent.

After the budget is announced, a familiar game will play itself out. The IMF will come knocking, with questions regarding the assumptions on which the revenue projections have been made.  The State Bank will pronounce its verdict in its usually stoic language in the first monetary policy statement of the new fiscal year in late July. Then will come the verdict of the money markets, as the first T bill and PIB auctions are held in the shadow of the new revenue projections.

Last year this tribunal was very unkind to the infant finance team that had assumed charge under very difficult circumstances. The IMF can be forgiven since its mind is not entirely its own to make up under these conditions.  Moves by the Pakistan Army to regain the trust of its superpower patrons can go a long way at the IMF board. But the State Bank and the money markets call their own tune. And their verdict will be crucial in establishing domestic confidence in the budgetary numbers to be made formal on Friday.

The writer is Editor Business and Economic policy for Express News and Express 24/7

Published in The Express Tribune, May 30^th, 2011.