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Adhering to IMF’s prior condition

The budget 2019-20 read out by Hammad Azhar the Minister of State for Revenue adheres to the International Monetary Fund’s (IMF’s) prior condition of the primary deficit at 0.6 percent of GDP: total deficit (3.15 trillion rupees) minus total markup (2.89 trillion rupees) as a percentage of projected GDP of 44 trillion rupees.

What the budget does not achieve are expectations of growth that would generate employment as well as higher tax collections, and a negative 7.1 percent budget deficit (a mere 0.1 percent lower than the revised estimates of the current year) that is unlikely to be acceptable to the IMF once the loan is approved. Growth however is forecast at 2.4 percent for next year which is realistic though would compromise the revenue targets associated with the growth rate that have been set by the Federal Board of Revenue.

The budget contained few surprises as Dr Hafeez Sheikh had already revealed his unrealistic budget targets in terms of revenue generation and expenditure allocations; nonetheless it does contain some shocking revelations and with Sheikh not being a details man there are several discrepancies within the documents.

The first shock received while reviewing the budget documents was the massive rise in the budgeted mark up as a component of current expenditure in comparison to the current year – 45 percent higher than the revised estimates of last year (1.987 trillion rupees to 2.891 trillion rupees) accounting for 40 percent of total budgeted current expenditure (compared to 35.5 percent in the outgoing year). The reason for the rise as well as continuing uncertainty as to how much further this critical expenditure item would rise would depend on the rupee value which has been consistently eroding as well as any further rise in the discount rate that would impact on domestic debt repayments as part of the ‘prior’ conditions under the staff level agreement with the International Monetary Fund (IMF).

The second biggest rise in allocations under development expenditure is for pensions – military pensions have risen by nearly 26 percent while civilian pensions have increased by 14 percent in comparison to the revised estimates of this year.

Defense has been earmarked 1.153 trillion rupees in comparison to 1.138 trillion rupees in the revised estimates of the current year – a 1.3 percent rise well below the rate of inflation projected at 11 to 13 percent for next year (a range that is not the norm in budget documents). Running of civilian government has been slashed from 460.2 billion rupees to 431.2 billion rupees however while allocation for pay has declined from 127 billion rupees (in the revised estimates of the current year) to 121 billion rupees inexplicably allowances have been raised from 115.4 billion rupees (in the revised estimates for 2018-19) to 120.4 billion rupees.

The second major shock in the budget documents is in the heavy reliance on an expensive source of borrowing – from foreign commercial banks to the tune of 450 billion rupees compared to only 6.9 billion rupees in the current year. One can only attribute lower reliance on this source of expensive funds to Asad Umer and one would have hoped that Dr Hafeez Sheikh had followed suit. Budget support from friendly countries indicates support to the tune of 750 billion rupees (around 5 billion dollars maximum at today’s rupee dollar parity) raising questions as to whether some of the loans from friendly countries have been rolled over as per another IMF prior condition.

The third major shock is that while Dr Hafeez Sheikh gave the target of an additional 1405 billion rupees to the Federal Board of Revenue in comparison to the revised estimates in the current year yet there was no mention of the 23 billion rupees additional revenue from other taxes mainly including the 6.2 percent rise in petroleum levy collections for next year reflecting the old school of raising revenue based on ease of collection that was followed by Ishaq Dar as well as other previous finance ministers. And non tax revenue is budgeted to increase by a whopping 40 percent with again an old school method to show a revenue rise on the books – SBP profit from the revised estimates of 147 billion rupees to the budgeted 406 billion rupees.

With respect to taxes the focus of the Khan administration remains on the pivotal role to be played by Assets Declaration Unit. The Federal Board of Revenue has intimated that it would generate 516 billion rupees including from additional sales tax, federal excise duty, customs duty and reducing the income threshold to 600000 rupees; phasing out tax exemptions would generate 300 billion rupees as well administrative measures which FBR officials refused to quantify. Refund bonds would be issued for exporters which may well be an answer to their liquidity crisis though time will tell if these bonds are acceptable by banks.

With poverty alleviation the buzz phrase in Prime Minister Imran Khan’s administration (Hafeez Sheikh known for bending the knee to programmes supported by all three appointing principal decision makers in the cabinet he serves(ed) – Musharraf, Asif Ali Zardari and Imran Khan – consistently maintained that the budget for 2019-20 is providing adequate safety nets to the poor and the vulnerable); the budget has earmarked: (i) 249.360 billion rupees as subsidy to keep tariff constant for those using electricity units less than 300 per month or so Sheikh stated; however while budgeted allocation for WAPDA/Pepco is marginally higher than the revised estimates of the current year – 191 billion rupees against 189.9 billion rupees yet K-Electric is budgeted to receive 18.9 billion rupees more next fiscal year; subsidies to Utility Stores Corporation, PASSCO for wheat/flour stock/procurement have been budgeted lower than in the current year and subsidy for sale of wheat to FATA has been scrapped; (ii) 200 billion rupees under the Public Sector Development Programme has been earmarked for poverty alleviation and social safety division – 70 billion rupees for centre for rural economy, 50 billion rupees for establishment of centre for social entrepreneurship, 20 billion rupees for Tahafuz progrmamme and 60 billion rupees to improve conditions in lagging districts; (iii) merged areas ten year development plan has been increased from 100 billion to 480 billion rupees; and (iv) nothing has been earmarked under Benazir Income Support Porgramme which has been subsumed under ehsaas porgramme however the Annual Plan 2019-20 document states that “presently the programme caters for 5.7 million beneficiaries through quarterly cash grants of 5000 rupees. Under ehsaas the cash grants will be linked with inflation.”

Stabilization policies, pledged by Dr Hafeez Sheikh during the launch of the Economic Survey, are unlikely to bear fruit given that the budget envisages unrealistic tax and non-tax revenue targets with no clarity on how much would be allocated for ehsaas, with no special provision for China Pakistan Economic Corridor projects and with the continuing rupee depreciation and the possibility of a further rise in the discount rate the budgeted allocations for mark up would have to be continuously readjusted upward and may well account for excess of 50 percent of total current expenditure by end next year.

One would have to wait and see how the IMF views this budget but based on his previous history Sheikh is likely to adjust the programme as and when required subject of course to support from the Prime Minister.

(The views expressed in this article are not necessarily those of the newspaper) 

Copyright Business Recorder, 2019

Anjum Ibrahim, "Adhering to IMF’s prior condition," Business Recorder. 2019-06-12.
Keywords: Economics , Budget 2019-20 , Tax collection , Revenue generation , Domestic debt , Finance Ministers , Tax revenue , Economic survey , Asad Umer , Ishaq Dar , Dr Hafeez Sheikh , CPEC , GDP , IMF

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