The IMF Programme which remained suspended for almost one year has become operational once again. Effectively the Programme has entered the period of the Sixth Quarterly Review up to the end of the current financial year. This implies that the Programme will continue till the end of September 2022.
Meanwhile the IMF has played a supportive role. Under the Rapid Financing Facility, a loan of $1.4 billion was released on a fast-track basis to counter the negative impact of Covid-19 in June 2020. Now at the time of resumption a quarterly installment of the loan under the Extended Fund Facility has also been advanced recently of $500 million.
The focus in this article is on the proposed budgetary framework in the IMF Programme for the years, 2021-22 and 2022-23. The expected budgetary outcome in 2020-21 according to the IMF is first examined.
The IMF expects that the budgetary target of 7.1 percent of the GDP in 2020-21 will be adhered to. However, there are reasons why the deficit could be significantly larger. First, there is an overstatement of the level of revenues, as follows:
(i) FBR revenues are shown at close to 4.7 trillion rupees by end-June 2021. This will require a growth rate of 30 percent from January to June, when it has been even below 6 percent in the first half of 2019-20. Of course, the growth rate is likely to be significantly higher given the low level of revenues from March to June 20 due to COVID-19. However, FBR revenues are more likely to be in the range of Rs 4.55 to Rs 4.6 trillion.
(ii) The revenue from the Petroleum levy is projected at Rs 511 billion. In the absence of escalation of the rate to Rs 30 per liter the target will not be reached and there could be a shortfall of up to Rs 75 billion.
(iii) The IMF expects Provincial tax revenues to show a growth rate of 61 percent in the second half of 2019-20. Even with a lower base last year such a high growth rate is extremely unlikely. It will be a positive outcome if Provincial tax revenues reach Rs 500 billion, as compared to the target of Rs 568 billion.
(iv) The IMF has also projected an extremely high growth rate of 186 percent in Provincial non-tax revenues from January to June 2020. Clearly, this is unattainable.
Overall, the IMF’s estimate of national revenues of Rs 6573 billion in 2020-21 is likely to be missed by over Rs 300 billion.
Expenditure projections by the IMF for 2020-21 are on the lower side as follows:
(i) Debt servicing is expected in the second half of the year to remain virtually unchanged at the level in the corresponding period of last year. In the first six months the growth rate was 15 percent. This is likely to continue as the SBP policy rate is unlikely to be brought down. Therefore, the cost of debt servicing is likely to be over Rs 3 trillion as compared to Rs 2.8 trillion projected by the IMF.
(ii) Releases against projects by the Planning Commission in the Federal PSDP already stand at Rs 501 billion as of April 2, 2021. The IMF anticipates that development spending over the year will be restricted to Rs 503 billion. This could be significantly exceeded as the targeted size of the PSDP for 2020-21 is Rs 650 billion.
Overall, on the expenditure side the IMF projection is likely to be on the lower side by Rs 300 billion. Combined with a revenue shortfall of Rs 300 billion, the implication is that the budget deficit could be higher by almost Rs 600 billion and reach 8.4 percent of the GDP in 2020-21 as compared to 7.1 percent of the GDP estimated by the IMF.
Turning to the targets currently in the Programme for 2021-22 and 2022-23 they are ambitious, especially on the fiscal front. The fiscal deficit is to be brought down to 5.5 percent in 2021-22. With a likely higher deficit this year of 8.4 percent of the GDP, the downward adjustment is to be as large as 2.9 percent of the GDP, which has never been achieved before. Further, the target is to bring down the deficit by another 1 percent of the GDP in 2022-23.
The budgetary framework targets a growth rate in FBR revenues of as high as 27 percent in 2021-22. It will have to be higher at 36 percent given the likelihood of a lower level of revenues in 2020-21 than the projection by IMF. Similarly, the expectation is that Provincial tax revenues will rise by 28 percent in 2021-22.
Fortunately, there is a scaling down of the growth rate target in FBR revenues to 16 percent in 2022-23. This makes out a case for shifting some of the required revenue growth to 2022-23. If the same growth rate is targeted for the next two years it will be 20 percent annually. This appears more attainable.
Major efforts will be necessary to limit the growth in federal current expenditure to below 10 percent as envisaged by the IMF in 2021-22. Given the expected spillover of expenditure in 2020-21 of almost Rs 300 billion, this will imply restricting the growth rate to only 5 percent. As such, there is inadequate provision even for increase in operating costs due to inflation.
The increase in current expenditure in absolute terms in the Programme, with due adjustment for higher spending in 2020-21, is Rs 316 billion. The IMF should be aware of the 25 percent increase in basic pay of Federal Government employees from July 1, 2021 onwards. This alone will cost Rs 50 billion. Further, if horizontal equity considerations require a similar increase for military personnel, then the total wage bill of the Federal Government will rise by almost Rs 180 billion. Provincial Government employees may also agitate for an increase in their emoluments.
A comprehensive agenda of tax reforms is proposed to be largely implemented before and in the Federal Budget for 2021-22. This includes reforms in the corporate income tax, personal income tax and sales tax. A major proposal is the integration of the Federal sales tax on goods with the provincial sales tax on services.
The primary thrust of the reform is withdrawal of exemptions, rationalization of tax credits and allowances and enhancements in reduced rates of sales tax. The overall expectation is that the taxation proposals will generate additional revenues of Rs 700 billion.
There is a risk that in the process of implementing the tax reforms the goal of greater progressivity of the tax system will be sacrificed. In fact, the growth rate of Federal indirect taxes in 2021-22 is projected by the IMF at 29 percent as compared to 25 percent in the case of the income tax.
There are serious issues also of the feasibility of implementation of tax reforms during a period when the economy is constrained with supply breakdowns and lockdowns to counter the rising incidence of Covid-19. Already, the enhancement in the Petroleum levy has been postponed.
Further, clustering of the tax reforms in the Budget of 2021-22 may be beyond the implementation capacity of FBR and may also stretch the limits of political feasibility. Therefore, the budgetary framework should focus on an appropriate pace of the reforms and include taxation proposals which are more progressive in character.
The merger of the goods and services sales tax and withdrawal of sales tax exemptions may be deferred to 2022-23 when the economy will hopefully have regained its growth momentum. Similarly, with high oil prices currently, more than doubling of the petroleum levy will not only have a regressive impact but will also trigger higher inflation.
Instead, more progressive reforms could be implemented. Conversion of the fixed and final tax regime on unearned incomes to advance tax combined with the filing of total income, earned and unearned, will make the tax system more progressive and yield significant additional revenues.
The Provincial Governments must be induced to develop the urban immoveable property tax. Fortunately, the FBR has completed a comprehensive market valuation of property in urban neighborhoods throughout the country. This information should be used to assess the level of property taxation on individual properties. The next major step is the development of the agricultural income tax following an improvement in the performance of the sector.
A more feasible set of budget deficit targets should be included in the budgetary framework. The recommended path is a reduction in the deficit from the likely 8.4 percent of the GDP this year to 7 percent of the GDP next year and to 5.5 percent of the GDP in 2022-23.
Fortunately, there is some fiscal space in terms of the size of Government debt. The estimate by the IMF is that it will approach 81 percent of the GDP by the end of 2020-21. However, no adjustment has been made for the significant appreciation in the value of the Rupee by the IMF. It is more likely that the level of Government debt will be below 78 percent of the GDP in June 2021.
Overall, there is a case for targeting for an ambitious budgetary framework while recognizing the limits to feasibility. The IMF has shown a sympathy on humanitarian grounds for the plight of the people of Pakistan in the face of successive attacks of Covid-19 which have affected lives and livelihoods. We hope that there will continue to be a spirit of accommodation and the Fund programme will be implemented at an appropriate pace.Dr Hafiz A Pasha, "Budgetary framework in IMF programme," Business Recorder. 2021-04-20.
Keywords: Economics , Economic growth , Economic activities , IMF program , FBR revenues , Petroleum levy , Provincial tax , IMF , GDP