This is not stabilisation!

bar chart and rippled Pakistani flag illustration

Vagaries of Consciousness

  • Would not alter the ground situation

The stabilisation measures announced by the Finance Minister Asad Umar are not good enough to meet the challenge facing the economy. We have been arguing in these pages that no threat facing the country is more serious than the deteriorating state of economy. The economic team had a shaky start (PT: 2-9-2018) but the hope was intact given the wide public support PTI enjoyed. The nation was anxiously waiting for the economic vision of the government and the strategy to restore the health of economy. As we would argue in this article, what has been announced by way of corrective measures is way insufficient from the required effort. In fact, it is not unfair to say the measures adopted signal either lack of a true understanding of risks confronting the economy or there is another plan that awaits unveiling at a future date.

The finance minister acknowledged that the budget left behind by the previous government had an underlying fiscal deficit of 7.2pc (Rs2880 billion) of GDP, and that to bring it to safe limits, it was to be reduced to 5.1pc (Rs2040 billion). We fully agree with this part of the assessment, only noting that the previous government had pitched the budget deficit at 4.9pc (Rs1890 billion), so aiming at 5.1pc is slightly higher.

It is surprising that despite a clear claim to the effect that deficit needs to be reduced by 2.1pc, actual measures are simply missing. What was needed was a clear statement comparing the original budget statement and new government’s re-assessment of realistic estimates. Then it should have specified clear measures correcting those realistic estimates and giving its own revised estimates. Unlike this, the government has issued a rudimentary one-pager calling it Budget at a Glance – Updated Budget Fiscal Year 2018-19. All it tells us is that with minor adjustments in different budget heads deficit would be 5.1pc compared to 4.9pc of the previous government. The journey from 4.9pc to 7.2pc and back to 5.1pc is a mystery.

The measures announced include: (a) new taxes of Rs183 billion out of which Rs92 billion would be tax savings by plugging evasion and leakages through the use of technology; (b) development expenditure cut of Rs75 billion to Rs725 billion from Rs800 billion; (c) individual tax rate, which was unjustly reduced from 35pc to 15pc in the original budget, has been increased to 29pc but the increased taxable limit from Rs400,000 to Rs1,200,000 has been retained; (d) a large number of excise, import and regulatory duties have been increased both on domestic production and on imports; (e) tax on cash transactions from banks has been increased from 0.4pc to 0.6pc; (f) non-filers, who were banned from purchasing vehicles and immovable property, would now be able to do so; and, (g) withdrawal of increased rates of petroleum levy announced in the last budget.

The last measure is only a notional action, as the increased rates of petroleum levy merely amounted to acquiring flexibility in collecting more duty should the need arise, but actually it was not used till now. The Minister has lamented on the low base of tax and has stated that more than 70,000 potential taxpayers have been identified and the government would go after them. This is fine, but we see a glaring example of excluding those who were already present in the tax-net. The previous government had announced this exclusion by raising the taxable income from Rs400,000 per annum to Rs1,200,000 per annum. This concession removed half the income taxpayers from the tax-net. Subsequently, after realising that this huge class may end-up becoming non-filers, a notional tax of Rs1000 for those in Rs400,000-800,000 and Rs2000 for Rs800,000-1,200,000. Afraid of adverse reactions from those who got this fantastic concession, the government stayed away from reversing this concession. This concession adds to the deficit, which means more debt, something that PTI has been condemning as something that is devouring Pakistan.

This uncertainty about economic policy is not helpful for the markets, where the initial euphoria of victory has subsided

Regarding the yields from the measures, even if we grant what is claimed, they add up to Rs258 billion, which is grossly inadequate compared to the required amount of Rs840 billion. But it is hard to accept the claim of yields when the minister himself has admitted that the tax measures of Rs183 include Rs92 billion to be saved by plugging the leakages. Such unspecified measures are not credible and not taken seriously by fiscal experts. Thus we have only Rs166 billion or hardly 0.3pc of GDP, which is way too low compared 2.1pc needed.

One positive step announced in the budget is the removal of the ban previously imposed on non-filers to purchase vehicles and immovable property. The ban had no economic justification nor was it consistent with the constitutional provisions. The fundamental consideration here is the basic distinction between filer and non-filer. When it was introduced, a few years ago, it was billed as an instrument to induce non-filers to become filers. The higher rate alone was not supposed to achieve this, though it was an incentive. The real hammer was the data made available for non-filers who were to be pursued by tax authorities for inquiries as to why they were not in the category of non-filer. Unfortunately, a permanent class of non-filers has been created and tax authorities are happy that they are paying higher taxes and not bothered why they are not coming forward to become filer. This practice has to end forthwith for all non-filers. As soon as a non-filer’s data becomes available, it must be a standard requirement to ask the non-filer to explain the reasons for being so. Until such time, it makes no sense to exclude some purchasers to enjoy the facility of being non-filer at a higher tax rate. The exclusion is giving rise to malpractices, such as the car dealers buying cars in the name of filers, paying less tax, and then selling to non-filers, thus depriving the state of precious tax revenues. There is also the consideration that some citizens – pensioners or those who get income through remittances – also suffer by paying higher taxes as they are not filers. FBR has to find a way to ensure that this class of citizens is not taxed as they have no taxable income.

The budgetary measures have not helped the nation to understand what economic policy the government plans to pursue. The stabilisation effort would not alter the ground situation. Many analysts have declared it to be a preparatory work before going to the IMF. This is significantly short of what a Fund program would require. If anything, this is an indication the government has no plan to approach the Fund, at least for now.

This uncertainty about economic policy is not helpful for the markets, where the initial euphoria of victory has subsided. The economic data for the first two months of the fiscal year is not very promising. The current account for the first two months remained higher by 10pc though it was significantly down to $600 million for the month of August compared to $2.1 billion in July. The Finance Minister has opined that the current account during the year would be around $18-21 billion. This statement is a clear indication that the government doesn’t have stabilisation in mind. However, sustaining this level of current account is a near impossibility as the financing for this purpose would not be available.

There are some indications that the reason why the government is not seeking a Fund program is that it is getting some cash support from Saudi Arabia and China. One wonders how much such a support would be and for how long would it be available. Even if such an outcome materialises, it would not address fiscal indiscipline and structural weaknesses in our system. Sooner or later, we have to face those realities and reform our economy.