The government of Pakistan Muslim League (Nawaz) presented the fifth and final budget of its five-year term in the Parliament on May 26 in an atmosphere of extreme political uncertainty.
Since the revelation of the Panama Leaks in April last year, the clouds of uncertainty on the political front have rendered the government virtually dysfunctional. This state of uncertainty is likely to prevail in the upcoming financial year as well, which means that the implementation of the budget will be a serious challenge for the government.
By looking at the budget 2017-18, it is abundantly clear that it is nothing but an election budget, full of promises with little resources in the pocket.
The budget also contains slogans (as will be revealed momentarily) which will be used by the government during the election campaign. Hence, the budget is not meant to address Pakistan’s prevailing economic challenges.
Revenue and expenditure numbers appear to be imaginary rather than real. Revenues are grossly overstated and expenditures are understated to arrive at an illusionary or slogan-oriented budget deficit number. Slippages in revenue, expenditure and budget deficit are therefore a foregone conclusion. Budget 2017-18 can therefore be termed as a non-serious budget.
It is well-known that the budget not only contains revenue and expenditure numbers in the accounting sense but also represents the fiscal policy that the government intends to pursue in the following year.
The expenditure numbers reveal that the government intends to pursue an expansionary fiscal policy which will be ably supported by an easy/expansionary monetary policy.
The budget for 2017-18 is not only irrelevant, but also exposes the fragility of revenue, expenditure and budget deficit numbers
The expansionary fiscal and monetary policy along with an inappropriate exchange rate policy will fuel the aggregate demand, which will be translated into further acceleration of imports with serious consequences for Pakistan’s balance of payments in 2017-18.
The budget for 2017-18 is not only irrelevant, but also exposes the fragility of revenue, expenditure and budget deficit numbers. And most importantly, the government has engaged in statistical manipulation, undertaken to derive a slogan for the upcoming elections.
Manipulation of numbers
Never before in the country’s history have we witnessed such a large-scale manipulation of statistics, particularly in the areas of economic growth, revenues, expenditures and budget deficit.
These manipulations were done for point scoring, showing a good performance of the economy and meeting the International Monetary Fund Program targets.
For example, revenues were over projected and expenditures were under-pitched to achieve a slogan-oriented budget deficit number on the one hand and a slogan like “restoring macroeconomic stability” on the other. That is, slogans like “lowest budget deficit number has been achieved in a decade” will be used for the upcoming election campaign.
Secondly, the government has claimed that the real Gross Domestic Product (GDP) grew by 5.3 percent in 2016-17. It was indeed surprising to see economic growth accelerating to 5.3 percent in the midst of a decline in overall electricity production by 16.4 percent and a decline of almost 7.0 percent in electricity consumption by the industries.
Furthermore, growth accelerated in the midst of declining private sector investment. Private investment is continuously on the decline since the past two years – going from 10.4 percent of GDP in 2014-15 to 10.2 percent in 2015-16 and to 9.9 percent in 2016-17.
While public sector investment has remained stagnant at 3.8 percent of GDP during 2014-15 and 2015-16, it increased to 4.3 percent in the presence of the so-called ‘fiscal consolidation’.
On the human capital side, Pakistan has witnessed a decline in literacy rate from 60 percent to 58 percent and also a decline in gross enrolment rate in primary education from 90 percent to 87 percent – more prominently in Punjab, from 100 percent to 93 percent.
What kind of message are we conveying to the world? Growth in Pakistan can accelerate even in the midst of declining private investment, declining production and consumption of electricity and worsening of human capital?
We should have realised before releasing the numbers for economic growth that such numbers are not at all consistent with perceived economic wisdom. But the finance minister wanted 5.3 percent growth anyway for slogan purposes, irrespective of the fact that whether this number makes sense or not.
This number was needed for the finance minister’s budget speech because he wanted to state that “the government has achieved the highest growth rate in the decade”. The actual growth rate for 2016-17 is estimated at 4.4 percent as against 3.1 percent in 2015-16 owing to the base effect in agriculture.
The government manipulated the growth number for 2013-14 for similar reasons and reported a growth of 4.0 percent while revising the growth number of 2011-12 from 4.4 percent to 3.8 percent, just to state that “it has achieved highest growth rate in the last six years”.
Such gimmickries have seriously damaged Pakistan’s statistics as well as the credibility of the Pakistan Bureau of Statistics (PBS). This is like damaging the thermometer to check fever. If statistics are damaged, we have no idea as to where the economy of Pakistan stands.
Today, we have virtually no idea as to how much the Federal Board of Revenue (FBR) is collecting in taxes. We have simply been told that the FBR has collected ‘x billion’ rupees in a particular year.
By relying on advance tax payments and holding the refunds/rebates of exporters, we have artificially inflated the tax revenue, and in the process we have severely damaged Pakistan’s industries and exports.
By holding back refunds/rebates and resorting to advance payment of taxes, roughly Rs. 250-300 billion belonging to businesses have been tied up, which is seriously hurting the business environment and creating liquidity problems for the businesses.
In other words, this is a new circular debt that has been created by the FBR. A future government will have to take a hit on the revenue to clear this new circular debt. Who will take the initiative?
The present government which is responsible for the creation of the new circular debt will certainly not clear the bill. Some future government will have to muster up courage to take this unpleasant and yet politically sensitive decision.
A non-serious budget
Thirdly, dwelling more on revenue, expenditure and budget deficit for the year 2017-18, it is clear that revenues are over-projected and expenditures are understated to arrive at a slogan-oriented budget deficit number.
To prove this assertion it is important to see where the current year’s budget is going to end or what will be the likely base for budgetary numbers for the year 2017-18.
The government is expecting the budget deficit to reach 4.2 percent of the GDP by the end of 2016-17.
During the first nine months (July-March) of the on-going fiscal year (2016-17), the budget deficit is estimated at 3.8 percent of the GDP. In the last quarter (April-June), the government expects to keep the budget deficit at 0.4 percent of the GDP – a tall order indeed.
The FBR has collected Rs. 2.52 trillion in the first ten months (July – April) of the on-going fiscal year, against Rs. 2.346 billion in the same period last year, thus exhibiting a growth of merely 7.4 percent. Why was the revenue growth so dismal?
The answer is that last year’s tax number was grossly inflated to arrive at the revenue target set by the IMF by resorting to holding of refunds/rebates and extraordinary recourse to advance taxes. Therefore, this year’s revenue growth is being measured from an artificially inflated base of last year.
In order to achieve the new downward revised revenue target of Rs. 3521 billion for the year 2016-17, the FBR will have to collect over Rs. 1000 billion in the remaining two months.
The government had collected Rs. 766 billion in the remaining two months (May and June) of the last fiscal year, therefore to collect over Rs. 1000 billion in the months of May and June 2017, the required growth is 31 percent. Is this growth possible in the remaining two months through fair means? The answer is absolutely not.
What would then be the likely collection for the year 2016-17? Assuming a growth of 13.5 percent in the remaining two months, the fiscal year 2016-17 is likely to end with Rs. 3388 billion or 8.9 percent higher than last year.
Even to arrive at Rs. 3388 billion, the FBR would pursue its traditional methods, that is, holding back refunds/rebates and taking massive advance taxes. These methods are already in vogue even to reach the target of Rs. 2519 billion in the first ten months.
Hence, the FBR would face a revenue shortfall of Rs. 133 billion against the revised downward target and Rs. 233 billion from the original target.
The performance of non-tax revenue has also been lacklustre in 2016-17. The likely shortfall in non-tax revenue is estimated at Rs. 171 billion owing to the non-realisation of targeted Coalition Support Fund (CSF), lower profit of the SBP due to lower interest rates, and decline in dividend income.
Higher than the targeted expenditure on the one hand and massive shortfall in revenue on the other, the budget deficit for the year, as per the finance minister’s accounting gimmickries, is estimated at 5.6 percent of GDP and not 4.2 percent of GDP as suggested by the government.
With a different revenue and expenditure base for the year 2016-17, the projection for the year 2017-18 appears too good to be true.
Both tax and non-tax revenues are overstated in 2017-18. For example, to achieve a target of Rs. 4013 billion from a base of Rs. 3388 billion, a growth of over 18 percent is required, and that too in an election year, as against 9 percent growth in 2016-17.
On non-tax revenue, the receipt of Rs. 142 billion under CSF is doubtful. Similarly, receipts under markup, dividend and the profit of the SBP are on the higher side. Rough calculation suggests that shortfall in tax and non-tax revenues are likely to be Rs. 400 billion (Rs. 200 billion in tax and Rs. 200 billion in non-tax) in 2017-18.
On the expenditure side, clearly the interest payment, defence spending and salaries and pension are grossly understated.
Furthermore, given an election year the government is most likely to spend more on the so-called development spending as well as provincial governments are not likely to generate surplus amounting to Rs. 347 billion or 1.0 percent of the GDP. Accordingly, the budget deficit is most likely to be in the range of 5.8 to 6.0 percent of the GDP in 2017-18.
The bottom line is that the budgetary numbers are extremely fragile. No serious attempt was made to prepare the 2017-18 budget as the finance minister was mostly traveling outside the country during the critical phase of the budget making exercise.
The staff of the Ministry of Finance simply put together these numbers realising very well that these numbers would change as the country enters the new fiscal year.
Furthermore, perhaps, this is the first time in decades that no meaningful discussion took place in the parliament on the budget. Both the ruling and the opposition parties have realised that the numbers are fragile and therefore, they did not waste time on discussing a budget which was based on imaginary numbers.
Pakistan’s balance of payments has come under tremendous pressure in 2016-17 owing to an extraordinary surge in imports; decline in exports and external flows such as remittances and the CSF. Resultantly, the current account deficit has widened to $7.247 billion during the first ten months (July – April) of the current fiscal year.
There are indications that the year 2016-17 may end with a current account deficit in the range of $8.5 – 9.0 billion as against $2.5 billion in the previous year.
As stated earlier, the budget 2017-18 represents the expansionary nature of the fiscal policy that the present government intends to pursue during 2017-18.
Supported by an easy/expansionary monetary policy on the one hand and an inappropriate exchange rate policy on the other, the budget 2017-18 would further aggravate the country’s balance of payments with serious consequences for the rise in external debt and liabilities and pressure on foreign exchange reserves.
The expansionary fiscal and monetary policy supported by an inappropriate exchange rate policy would further fuel aggregate demand which will be translated into increased acceleration in imports. Exports are on the decline for the last three years in a row – declining from $25 billion in 2013-14 to around $21.0 billion in 2016-17.
Senseless taxation to achieve revenue targets under the IMF Program made Pakistan’s exports non-competitive in the international market. Holding back refunds of exporters to jack up revenue created liquidity problem for the exporters.
On the expenditure side, clearly the interest payment, defence spending and salaries and pension are grossly understated
Exporters were forced to borrow from commercial banks to run their factories, hence adding to the cost of their doing businesses. Infrastructural bottlenecks and inappropriate exchange rate policy also made Pakistan’s exports non-competitive in the international market. These factors will most probably be present in 2017-18 as well.
An expansionary fiscal and monetary policy, along with the factors listed above, will further widen the current account deficit to $12.5-13.5 billion in 2017-18 as opposed to $8.5-9.0 billion in 2016-17.
With debt servicing requirement rising to $8.0–8.5 billion in 2017-18, the total financing requirement for the year would be in the range of $20.5–22.0 billion. Likely inflows from traditional and Chinese sources along with foreign direct investment are estimated to be $11.5 billion, thus leaving a financing gap of $9.0-10.5 billion in 2017-18 (See Tables 1-4).
Where would this amount come from? This is a million dollar question. Will Pakistan be going back to the IMF in March-April 2018? With this development in external balance of payments, Pakistan’s external debt and liabilities would cross $90 billion by end–June 2018 as against $80 billion in end-June 2017.
As a result of these developments in the balance of payments, Pakistan’s foreign exchange reserves have come under severe pressure.
Foreign exchange reserves stood at $18.1 billion in end-June 2016. By June 2, 2017 it has already declined to $15.7 billion – a loss of $2.4 billion. Do our reserves stand at $15.7 billion today? The answer is obviously no.
The SBP is short by $3.5 billion as of April 30th, 2017. In other words, the SBP, in order to prevent forex reserves falling sharply with adverse consequences for the exchange rate, borrowed $3.5 billion from commercial banks for a period of 1 month, 2 months, and 3 months in the forward market.
Therefore, forex reserves stood at $12.2 billion as of June 2, 2017 and not $15.7 billion as reported by the SBP. In other words, Pakistan has lost $6 billion in forex reserves during 2016-17. Forex reserves will come again under pressure during 2017-18 owing to further deterioration in the current account deficit.
This is the emerging balance of payments, forex reserves and debt situation for Pakistan during 2016-17 and 2017-18. Budget 2017-18 will play a critical role in the emerging scenario. The Finance Minister, instead of shooting the messenger, should take corrective measures to prevent the emergent crisis in 2017-18.