Federal Budget News for 2021-22

 The current government is going to present its third budget in front of parliament on 11th June 2021.  This budget is said to be a developmental budget. The government of Pakistan is very hopeful that Pakistan would come out of the phase of stabilization and move towards inclusive growth. This policy brief highlights those major sectors that contributed to Pakistan’s growth in the previous fiscal year and what actions need to be taken to increase the growth for the next fiscal year.

Current Economic Situation

Pakistan has managed the Covid-19 pandemic relatively well so far. From the ‘smart lockdowns’, stimulus package of Rs1.24 trillion, to a well-organized vaccination program, the government deserves to be commended for its mature efforts. As the country recovers from the third, and hopefully the last, wave of the disease, the economic report card forFY2020-21 is beginning to emerge. The economy grew by 3.94% in the current fiscal year, surpassing all expectations. The agriculture sector had historical production levels of major crops such as rice, wheat, and maize. Large-scale manufacturing (LSM) grew by9.3% during 9MFY21, crossing the pre-Coved level. The services sector also showed a 4.4% growth, led by retail, wholesale, and financial sectors. How much of such economic growth is pro-poor and inclusive is yet to be evaluated?

 For July-April FY21, the current account posted a surplus of $773 million, owing to record remittances ($24.2 billion, growth of 29%) and stronger exports performance ($20.9 billion, growth of 13.6%). The remittances were partially buoyed by the Covid-19effect due to which ex-pats extended greater financial support to their families in Pakistan. The textile export sector benefitted from Coved-related lockdowns in exporting competitors such as India and Bangladesh. The sustainability of this trend would certainly depend on how the government gives a turn to its monetary and fiscal policies. On the revenue side, FBR has collected Rs4.167trillion in 11MFY21 and appears on track to achieve the revised revenue target of Rs4.7 trillion. While the collection is impressive considering the pandemic, its breakdown shows a heavy reliance of 65% on indirect taxation, which further hurts the inflation-stricken poor. The average CPI inflation during July-AprilFY21 was recorded at 8.6 percent, which is quite high but is down from 11.2 percent from the same period inFY20. The main factors behind high inflation continue to be supply-sided rather than demand induced. That also brings into question the rationale behind high policy rates set by the State Bank of Pakistan (SBP). Thebe has held the policy rate at 7% since June 2020, bringing it down from 13.25% owing to the recessionary pressures of the pandemic. The monetarist approach of Friedman would no longer work in Pakistan if the key idea is to have inclusive and sustainable growth. Policymakers need to think of a substantial cut in policy rate at least up to 5% to give a boost to business investment

Taxation and Revenue

For FY22, the government is targeting a revenue ofRs5.8 trillion. With an increase of roughly 24% over the current target, there is a justified concern that such an ambitious target may be pursued without addressing the structural deficiencies of the tax administration and broadening the tax base. That would not only stifle investment and growth but also further hurt the existing taxpayers and further reduce trust in government. The targeted economic growth rate of4.8% will only provide some increase in revenues given the low tax buoyancy of Pakistan. Most of the increase will have to come from administrative measures such as broadening the tax base and withdrawing tax exemptions. There has always been a lack of political will to tax the influential elites, and that trend needs to change if tax revenues have to be increased progressively. The finance minister did mention that the salaried class will not be burdened with tax increases and that innovative means will be used while bringing traders into the tax net and prosecuting tax evaders. There is no denying the fact that most of our imports are inelastic. This is an implicit kind of hurdle in the way of inclusive growth. A cap on the import of luxury cars, cosmetics, edibles, and cell phones may give a great boost to the economy. The net potential of stopping unnecessary imports is significantly higher than the revenue being generated from such imports. As for instance, our imports from China have substantially increased for the last six years as compared to what we export over there. Public policies should be framed in such a way that terms of trade could be shifted towards Pakistan. Without promoting local manufacturers, the targets of inclusive growth cannot be achieved

 Government Projections and Needed Actions

The Medium-Term Budget Strategy Paper (MTBSP)spells out some encouraging objectives: pursuing sustainable and inclusive growth, broadening the tax base and tax net, improving tax policy and administration, increasing the share of direct taxes, protecting vulnerable segments, controlling inflation and growth of circular debt, only implementing minimal increases in current spending, and mitigating the impact of Covad-19, among others. The government intends to give special attention to the construction, agriculture, energy, and IT sectors as well.

 Development Sector

The federal PSDP is being increased by 38% to Rs900 billion from the current Rs650 billion. The mid-year review (July-December FY21) showed only 34% of PSDP is being spent. Adding another quarter, and the government was unable to spend 40% of the development budget in 9MFY21. Pakistan is very weak in the implementation of budgetary estimates. The common practice of revised estimates is not fairly transparent. The subsequent budgetary manipulations are hardly made public. There is an incredible backlog of ongoing projects that spreads the resources too thin and discourages new initiatives. It needs to be asked how the government plans to tackle these constraints. The throw-forward of PSDP should be contained by imposing a temporary moratorium on new projects, completing the existing projects, and shelving projects not making any progress. Furthermore, the confidence of public administrators needs to be restored by avoiding unnecessary probing and only initiating investigations based on substantial intelligence reports.

Agriculture Sector

The agricultural sector, one of the great contributors to our GDP, needs special focus as it is the perfect conduit for the uplift of people in rural regions that have been left largely neglected. The key focus should be on production and productivity. Better agricultural incomes would also curb the rapid urbanization that is choking major cities. The finance minister has already hinted at some innovative agricultural reforms. Farmers need to be provided cheaper fertilizer and electricity so that their margins may improve. There are Isa's need for agricultural research funding to develop local and high-yielding seeds for wheat, cotton, and other crops. The irrational dissemination of subsidies needs to be revisited for enhancing economic efficiencies. The government needs to actively teach farmers how to add value to their products so that better returns and terms of trade can be achieved. Special regulatory mechanisms need to be strengthened for curtailing market distortions and subsequent inefficiencies. Livestock needs to be improved for better yields and incentives should be given for setting up milk processing plants. Farmers need to be given better access to wholesale markets. There is also immense potential in the blue economy. Productive agricultural reforms will also improve food security, in which Pakistan ranks 80/113 in the Global Food Security Index.

 Defense Sector

The current situation in Pakistan poses a challenge to Pakistan’s security. Therefore, no compromise can be made for the defense of the country. 

The defense budget, being an important part of our country’s security, should be drawn from every budget of the country. Therefore, the Government needs to rationalize the Defense budget. There shall be no compromise on the combat budget of the country but rationalization needs to be done for the non-combat budget.

 Circular Debt

A major drain on public resources is circular debt, particularly in the energy sector. Circular debt amid high capacity payments in the energy sector is aboveRs1 trillion currently, and the government is forced to increase energy tariffs to recover some of that from paying consumers. The exponential growth of circular debt needs to be arrested immediately otherwise it may spiral out of control. Furthermore, transmission and distribution losses are around 20%, which are almost double the global average. Negotiations with IPPs should continue until a relative parity between Island the government is achieved. On the other hand, there is a need to upgrade the inefficient transmission system and loss-making distribution companies. The government should also look to liberalize the energy sector so that competition can make it more efficient. Cheaper sources of energy generation have to be integrated within the energy mix to lower the basket price, and focus has to be put on the competitiveness of the generation, transmission, and distribution business. Bringing public-private partnerships and investments into the sector can reform market orientations.

 IT Sector

The importance of the IT sector is being rightfully emphasized, as it has immense potential for raising exports and generating jobs for the tech-savvy youth-commerce and freelancing has seen a boom during the pandemic. 

One needs to look at the generous policies of Alibaba and Amazon. Moreover, IT has become a common medium of education, especially during the pandemic. During the eight months of the current fiscal year, IT exports reached $1.3 trillion, an increase of 41.4% over last year’s corresponding period. The export surge is partially due to the Covid-19 lockdowns and a favorable exchange rate. Pakistan’s youth bulge can be provided ample employment if the IT infrastructure is developed and investments in IT are encouraged. Tax policy on IT hardware such as cell phones, laptops, and the IT sector as a whole, needs to be accommodative until the sector matures. Internet penetration should be encouraged by making cheap and fast internet access to all. Hurdles in installing fiber optic cables, such as government NOCs and passage rights, need to be removed. Internet connectivity should be seen as a basic necessity in today’s world that is undergoing the Fourth Industrial Revolution.