The PTI government had a bumpy start on the economic front. It inherited an economic crisis — more or less a standard tradition for any new government in Pakistan — with a massive current account deficit (CAD) and an enormously overvalued currency. It changed its finance team eight months into the government and finally managed to enter an IMF programme but not without some tough conditions forcing unpopular yet necessary decisions. Not to forget the sword of blacklisting by FATF that kept hanging over the government’s head. Then came Covid-19, a one-in-a-hundred-years phenomenon which played havoc with the economy. Inflation started rising. Bureaucracy stopped working, amidst an accountability drive, while opposition took it to the streets.
Somehow, navigating its way through this hurdle race, the government finally managed to deliver a growth of 3.94% this year. Two years of stabilisation and recovery efforts, and then some experimentation, finally paid off. With tough decisions already under its belt, forex reserves recouped, devaluation undertaken, CAD under control, primary balance achieved as a result of belt tightening, the third wave of Covid-19 receding and the vaccinations well underway, the next challenge for the government is to change gears, sustain the growth momentum and rev up the economy to get PTI ready for the next elections. And that’s precisely what the budget 2021-22 aims to deliver.
By all standards, this is as good as it can get, within the given limitations. The only legitimate criticism on this budget, even from the worst critics, is if the government can really pull this off; what will happen with the IMF programme; whether this renewed emphasis on growth will push us yet again towards a repeated boom-and-bust cycle; and most importantly if the government will be able to control inflation. But there is almost a unanimous agreement on the general direction of the budget. If this country is to provide employment to its rapidly growing population, growth is the only answer.
By now, enough commentaries are available on what’s in the budget. But in short, it’s a business-friendly budget, has a significant pro-poor and pro-citizen focus, and promises to bring a fundamental shift in some areas. Most importantly, it provides the well-needed shot of positivity that the country has desperately been gasping for, paving the way for renewed economic activity and investment.
For businesses, investors and industry, the budget brings a number of good news for construction, automobile, information technology, electronics, pharmaceutical, textiles, and a number of other sectors, in the form of reduction or exemption of duties and taxes. It has various SME-focused provisions that will provide breathing space to small businesses that suffered immensely during the pandemic. There is something for stock market investors too (reduction in capital gains tax) to restore the market confidence, while a number of generous incentives have also been offered to lure investors to the planned special technology zones.
Perhaps the most significant achievement of this budget is a major shift in our taxation approach. With a promise of self-assessments, third party audits, electronic processing and issuance of refunds, reduction in arbitrary discretionary powers of the tax officials and an end to taxpayers’ harassment, what else could a businessman ask for?
For citizens, the budget brings a massive 38% increase in the public sector development programme (PSDP) and targets a whopping 61% growth in the national PSDP. With increased public spending will come the much-needed growth. For the poorest of the poor, there is continued focus on the Ehsaas programme, along with a proposal to give interest-free loans to four to six million families at the bottom of the pyramid. The power sector subsidies have also been increased to dilute the pressure for tariff increase in near future. And then there is enough money for vaccinating the masses.
Now let’s come to the critique.
First the reality check. The revenue target for next year is indeed ambitious but not impossible. The targeted 5% GDP growth and inflation will help. The increased development spending will also play a role. The Rs100 billion gap, however, is already there on account of dropping the tax on internet and cellular calls. But the most challenging part are the administrative measures that are targeted to contribute nearly Rs240 billion. There is a clear strategy in place, with increased POS penetration and incentives for retailers and citizens. But to what extent it will be successful remains to be seen. Then comes the target of Rs610 billion for Petroleum Development Levy, which means that soon the government will need to increase the rate of petroleum products, barring any drop in the international prices. Furthermore, on the development side, it would be hard to push the rusting government machinery to jack up development spending quickly.
On the IMF programme, reportedly the Fund believes that if Pakistan’s growth trajectory is already better than expected, why push it harder. They are also concerned about a number of unmet programme conditions, such as taxation measures, tariff increase, SBP autonomy, etc. While political undercurrents will play a definite role in deciding the fate of the programme, there is a significant likelihood that the programme may get suspended for the time being. If it happens, there could be implications. For now, the CAD remains in control and forex reserves are healthy. But suspension can put the planned $3.1 billion inflow from IMF in jeopardy and can also have bearing on the $2.7 billion programme loans that are part of the budget. It can even affect the market response to Pakistan’s efforts to raise $3.5 billion through Eurobond/International Sukuks and increase its cost.
With growth in sight, the risk of facing yet another boom-and-bust cycle is also real. But with a market-determined exchange rate, there is an inherent check against higher imports, whereby any pressure will lead to devaluation, rationalising demand. Pro-industrial policies targeting import substitution may help too. Lastly but most importantly, inflationary pressure will remain high. Both supply side measures, as well as interest rate adjustment, would be needed. This means that SBP’s autonomy and delinking the exchange rate and monetary policy from the fiscal concerns would be the key.
Notwithstanding these challenges however, the budget will help in restoring business confidence. What the government must realise though is that besides the budget, the political narrative now also needs to change gears and shift from accountability to prosperity, development, growth and reforms.
Published in The Express Tribune, June 15h, 2021.
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