NAYA PAKISTAN – This slogan gives a new hope to the Nation. The purpose of this article is to inform the government on the way forward strategies. Although our nation is bullish on Naya Pakistan, however, historic trends coinciding with prudent financial projections for next five years, suggests that the desired change is a big ask.
It is important to bear in mind the following:-
a. Debt sensitivity to Interest rate
An increase in interest rate (keeping other factors constant) means more interest is required to be paid which effectively means an increase in outstanding balance. At end of June 2018, government domestic debt was Rs 16,415 billion out of which Rs 3,667 billion was borrowed from SBP. Therefore, net outstanding domestic debt was Rs 12,748 billion. A one percent increase in interest rate means Rs 127.48 billion (Rs 12,748 billion x 1%) additional interest payments. In other words, a one percent increase in interest rate increases the government debt by Rs 127.48 billion causing increased per capita debt and debt to GDP ratio. This shows that the cost of interest rate hike by caretaker setup, sans mandate, to the exchequer was Rs 127 billion
b. Debt sensitivity to Exchange rate
Similarly, an increase in foreign exchange rate (parity of PKR with Dollar) increases outstanding debt balances in PKR terms. At end of June 2018, domestic debt was Rs 16,415 billion which translates to $ 131 billion @ PKR 125/$. An 8% increase in PKR/$ exchange (i.e. @ PKR 135/$ rate would result in an increase of Rs 1,313 billion in domestic debt. In other words, a one rupee increase in PKR/Dollar rate will cost Rs 131 billion in additional domestic debt balances.
Based on the supposition that the PTI government will scrap the budget presented by the previous government for 2018-19 and shall present a new budget, we have projected key economic indicators for the future five years, with certain assumptions.
1. Revenues
During first year, revenues are estimated to be Rs. 6,119 billion which is expected to increase each subsequent year, reaching a maximum of Rs. 11,967 billion in 2022-23. During the tenure of five years, PTI is expected to add Rs. 43,950 billion in revenues.
a. Tax Revenues
Prime Minister and PTI chief, Imran Khan, claimed to collect Rs. 8,000 billion from tax payers during his regime. Although his claim apparently seems farfetched, however statistically speaking, this figure is very much within reach even if no extraordinary efforts are made by PTI. During both PPP’s and PMLN’s latest tenures the tax revenue figures have almost doubled during, therefore, collection of Rs. 8,000 billion in next five years would be no miracle.
We have assumed that PTI government would collect Rs 5,000 billion during first year of their regime which would increase by 20% each year. By 2023, the tax revenue collection may jack up to Rs 10,368 billion following this trend. We expect much more from this government given its tall claims, however, we have kept our assumptions on the conservative side.
b. Non-Tax Revenues
Non-tax revenues have been assumed to increase generally by 10% each year. Receipts on account of Defense (Coalition Support Fund) during first year are expected to be same as last year, which would increase by 10% each subsequent year. After removal of legal hindrances, Gas Infrastructure Development Cess is expected to contribute at least Rs. 100 billion for first year, increased by 10% during each subsequent year. However, Asad Umar is committed to abolish this cess. Whether his commitment will be honoured is yet to be determined. Receipt from United Nations peace keeping missions are expected to remain at Rs. 35 billion per year.
Total non-tax revenues are expected to be Rs 1,119 billion for first year which may rise to Rs 1,599 billion during last year, adding a total of Rs 6,742 billion for five years.
2. Expenditure
In his inaugural speech, the prime minster weighed on austerity measures to cut excessive government expenditures. However, these measures are not expected to result in significant savings. The overall expenditure is expected to be Rs 4,220 billion for first year. The expenditure is expected to increase by 10% each year generally. Domestic debt servicing will cost Rs 1,528 billion at 7.5% for first year while Foreign debt servicing will cost Rs 159 billion at 4.5%.
The impact of rising oil prices internationally have also been incorporated at Rs 15 billion to Rs.20 billion per annum as the oil prices are expected to reach $ 150 per barrel. PTI government is expected to spend a total of Rs. 25,575 billion during its five year tenure. However, it is yet to be seen whether there is any significant reduction in spending in actual amid claims during first speech of newly elected PM.
3. Overall Deficit
The overall deficit for first year is expected to be Rs 1,980 billion while Rs 1,957 billon, Rs 1,883 billion, Rs 1,745 billion and Rs 1,523 billion deficits are expected during 2019-20, 2020-21, 2021-22 and 2022-23, respectively.
4. Deficit Financing
Deficits are expected to be financed through Domestic and foreign sources in ratio of 7 to 3, respectively, given the historical pattern of last ten years. To finance the deficit if five years, a total of Rs. 9273billion will be required to be borrowed by this government.
It would be interesting to see that how the Honourable PM will fulfil his promise of breaking debt chains. To do so, his government will need to prepare a zero deficit budget during their tenure. And to accomplish this mammoth task, new revenue avenues will have to be identified and existing revenue sources will be required to be milked effectively as the much appreciated austerity measures announced by PM, although symbolically significant, would not contribute to savings of more than Rs 15 to Rs 20 billion per annum.
If the budget presented by previous government is scrapped and a revised budget with target of Rs 5,000 billion in tax revenues is tabled, even then the budget deficit is inevitable.
Ashfaq Yousuf Tola, "Naya Pakistan: a big ask," Business Recorder. 2018-09-01.Keywords: Historic trends , Economic indicators , Tax revenue , Infrastructure development , Revenue avenues , Breaking debt , Deficit financing , PTI , PMLN , PPP , SBP , PKR