The fiscal facts of life

IMF noticed problems in revenue projections and financing plan long before hand of God could be blamed for slippages.

Well that’s a wrap folks. The Finance Bill 2011 passed the National Assembly largely unmolested. What now?

The IMF team will be visiting once the consolidated numbers from the concluded fiscal year 2010 -2011 are in, and that should take till July 15, as per the finance ministry announcement. The first institutional response to the budgetary numbers will be delivered then, although the visit is usually a private affair and the content of the IMF’s feedback is rarely shared with the public, unless the feedback happens to be positive that is, which has not happened in many years.

Then comes the first auction of treasury bills of the new fiscal year, a chance for the money markets to deliver their unemotional verdict. The outgoing fiscal year has seen yields increase by 100 to 150 basis points depending on tenor, and not all of this increase is attributable to inflationary expectations. Much of it was a vote of no-confidence in the government’s financing plan for its fiscal deficit projections, a bet by the markets that the government would not be able to raise the funds required for its spending and would be forced to either borrow or print the money.

Then comes the pronouncement of the State Bank of Pakistan in the first monetary policy announcement of the new fiscal year, sometime in end July. The State Bank will give us an unhindered view of the government’s financing plan for the fiscal deficit, unhindered by any political considerations at least.

Last year, this powerful troika took a very grim view of the fiscal numbers. The markets started pricing in higher borrowings by (the) government right from the beginning. And this was long before the floods. The IMF, in its subsequent pronouncements, at the Pakistan Development Forum for instance, was careful to refer to the ‘pre-flood’ numbers, to underscore the fact that they saw problems in the revenue projections and the financing plan long before the hand of God could be blamed for the slippages.

This is the reason why you see a mad dash to pull together revenues in the last few days of the fiscal year. Refunds are being withheld, claims being pursued aggressively and dire warnings being issued to either declare a tax liability in return for an amnesty or face consequences. This is the back story behind the dispute between the KESC and the Federal Board of Revenue (FBR) for instance, just like how the FBR froze the PSO’s accounts against a tax liability in the closing days of the last quarter to help meet a target.

This is also the reason why tax experts will usually deduct 20-odd billion from the revenue numbers once the consolidated accounts are presented to correct for the withholdings that have been forcibly included as revenue.

We’ll wait to see what the troika of the economic world makes of the fiscal numbers of the outgoing year once they are presented. But there is this much to say: This has probably been the most disastrous fiscal year of this government. The main reason for the disaster is simple, this is the year when the government’s relationship with its creditors broke down comprehensively. Part of the reason for this is the eroding trust between the government and the United States, which ‘speaks softly but carries a big stick’ at the IMF executive board.

But a large part of the reason has to do with the weak ownership of the reform process begun in November 2008. Principally, the reforms focused on revenue mobilisation and, despite a strong push to get a value added tax (VAT) going, “political consensus eluded” this government, to borrow a phrase from the finance minister’s budget speech. It would be a good idea for the minister to think about how and why the consensus “eluded” his efforts, considering not a single person from the government was able to articulately present the case for a VAT before the public in the crucial days when the bill was being debated in committee.

Repairing this breach with the creditors will be job number one for fiscal year 2012.



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