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Budget 2023: Falling short of reforms

"Cosmetic measures, introduced in the budget, fall short of much-needed comprehensive structural reforms to overcome our economic woes persisting and perpetuating under all governments, civil and military alike"

By Abdul Rauf Shakoori & Dr. Ikramul Haq

The coalition government of Pakistan Democratic Movement (PDM), led by Prime Minister Shahbez Sharif, came into power on April 11, 2022 by ousting Premier Imran Khan through a vote of no-confidence under Article 95 of the Constitution of Islamic Republic of Pakistan [“the Constitution”] on April 9, 2022, presented its first budget for fiscal year 2022-23 on June 10, 2022 in the 15th National Assembly—the tenure of which under Article 52 of the Constitution is five years from the first session held on August 13, 2018, if not dissolved before, and fresh elections are to be held by a caretaker government within 60 days starting from August 13, 2023 under Article 224 of the Constitution.

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The incumbent government intending to complete its constitutional tenure under difficult economic and political situation, while preparing the budget, was faced with historic fiscal, trade and current account deficits, coupled with double-digit inflation, fast depleting foreign exchange reserves, acute energy crisis etc. Additionally, increase in international fuel and commodity prices and political instability were posing formidable challenges, generating pressure on forex reserves and green pack, losing its value and adding fuel to fire of inflation.

In the above backdrop, the outlay of the budget presented by Finance Minister, Miftah Ismail, is R. 9.5 trillion, while the Federal Board of Revenue (FBR), apex revenue authority of Pakistan, is assigned the target of Rs 7 trillion against the Rs. 6 trillion for the outgoing fiscal year. For bridging the huge gap between expenses and net receipts, the federal government, as usual, is relying on fresh loans. The budget documents show that debt servicing is budgeted at Rs. 4 trillion.  A look at the numbers for financial year 2017-2018 shows public debt around Rs 25,000 billion and in March 2022, this figure reached Rs. 44.365 billion—72.5% of GDP despite change in its base year by the outgoing coalition government of Pakistan Tehreek-i-Insaf (PTI). It is pertinent to mention that as per Fiscal responsibility and Debt Limitation Act, 2005, the percentage of government borrowing should not have exceeded 60% of the GDP.

The government estimates inflation of 11.5% and GDP growth at 5%. If these estimates are believed to be true then FBR’s target seems to be realistic and achievable. However, with recent import restrictions and exchange rate challenges, tax collection, mainly dependent on imports, can see a drop. Therefore, FBR needs to focus on organic growth in tax collection.

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In the recent past, it can be observed that federal budget lasted for only a few months and the PTI government always missed its overall revenue targets, despite FBR’s healthy growth of 28%. For meeting revenue gaps PTI government, relied on issuing “mini-budgets” to impose additional taxes. It became a regular practice for PTI government to resort to two to three finance supplementary bills every year to generate revenue by imposing additional taxes. This inconsistency in fiscal policy has already made business environment formidable where companies cannot plan and estimate their financial goals with reasonable assurance.

Another challenge, faced by the economy, is piling up of current account deficit—no government has so far bothered to restructure fiscal policy to deal with the burgeoning fiscal deficit, except by introducing cosmetic measures. The monstrous fiscal deficit, mother of all ills, is increasing annually. Resultantly, every government, including the present one, has been relying on borrowing and exhausting huge chunks of revenue towards interest payment rather than in generating economic activity.

Delay in reaching an agreement with International Monetary Fund (IMF) for release of the next tranche of 39-months Extended Fund Facility (EFF) Programme of US$ 6 billion, signed by the PTI government in July 2019, is creating uncertainties about meeting foreign financial obligations. Though the present government has taken some unpopular steps, yet necessary decisions for economic revival like the withdrawal of fuel subsidies and a plan to gradually remove subsidies on electricity and other utilities to revive the IMF programme are still under consideration as hinted at by the Finance Minister. These can work as stepping stones toward addressing financial imbalances in the economy. The Finance Minister also indicated further tightening measures to bring twin deficits—fiscal and current accounts—within reasonable limits to achieve sustainable GDP growth without losing foreign reserves. He also hinted at increasing tax-to-GDP ratio that fell during the earlier government to 8.6% from 11.1% in 2018, despite imposing heavy indirect taxes. The current government is expecting its raise to 9.2% during financial year 2022-23.

In the current budget, it appears that the Finance Minister has been successful in striking a balance between revenue and relief measures. The budget explores new avenues of taxation and at the same time has offered some relief to people who are already absorbing a huge burden of taxes. Salary slabs have been rationalized in a way that barring individuals falling in highest slabs, there has been a general respite for those in the lower slabs. This will help in increasing disposable income of persons in fixed income group to rejuvenate the economic cycle.  Moreover, the government has announced a complete ban on the purchase of vehicles and luxury items—this might save some foreign exchange. However, it might impact growth as well.  As a social protection measure, allocation under the Benazir Income Support Programme (BISP) has been increased from Rs. 250 billion to Rs. 364 billion. During the next year, nine million families will have access to the Benazir Kifalat cash transfer programme facility under BISP for which an amount of Rs. 266 billion has been earmarked.

Another positive measure is offering growth opportunities to the youth that constitute about 65% of our population, by thinking of establishing a national youth commission to design different employment schemes. The Finance Minister announced access to employment opportunities to two million young people. They will be provided interest-free loans up to Rs. 500,000 each.

The government has also raised the budget for higher education and allocated Rs. 65 billion—additionally, there is an allocation of Rs. 44 billion for development schemes of the Higher Education Commission (HEC) of Pakistan under the Public Sector Development Programme (PSDP). The government claims that this allocation is 67% higher than the outgoing budget year. For offering greater opportunities for excellence for students of Balochistan and merged districts of Khyber Pakhtunkhwa, the budget of HEC includes 5,000 scholarships. Further, for developing technical skills of the youth through emerging global trends, the government has announced that one hundred thousand laptops will be given to students on easy installments across the country.

The role of infrastructure and communication facilities is of paramount importance in the progress of any country.  It benefits the industrial supply chain and activity and also gives market access to farmers who can generate better value for their crops. The Pakistan Muslim League (Nawaz)—PMLN—has a history of initiating, executing, and completing projects like highways, and motorways. At the end of its tenure in 2018, the PMLN budgeted over Rs. 1,000 billion for federal public sector, which was slashed nearly to half in the last budget by the PTI government. Now in 2023, the government has increased it to Rs. 800 billion. The Finance Minister has also announced additional funds for the earlier completion of Mohmand Dam and Diamir Bhasha Dam, and the highway connecting both seaports with China will be completed on urgent basis. However, for long-term sustainable and higher growth and inclusive development, all political parties, despite serious differences, must agree on structural/fiscal reforms to address the issues pertaining to our economic survival and achieving self-sustainability [Tax reforms: Agenda for Self-Sustainability, Management Accountant, Volume 31.2 [pp 36-38], March-April 2022 and Roadmap to Self-Sustainability, Management Accountant, Volume 31.2 [pp 36-38], March-April 2022].

Cosmetic measures, introduced in the budget, fall short of much-needed comprehensive structural reforms to overcome our economic woes persisting and perpetuating under all governments, civil and military alike. Any roadmap for implementing long-delayed reforms to come out of our perpetual fiscal mess was, unfortunately, once again missing in the budget speech of the Finance Minister, Dr. Miftah Ismail, who has yet to be elected after appointed under Article 91(9) of the Constitution as was done in 2018.

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Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. Dr. Ikramul Haq, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions, with Huzaima Bukhari.

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