By Asad Rizvi
June 13, 2020 (MLN): I don’t want to comment on BUDGET FY21window dressing strategy, because when the economy is unable to generate income and is fragile for years, it keep shrinking.
This is why time has proved that it is difficult to rely on economic numbers, which are not the perfect guide.
Since over a decade, various governments have failed to provide stimulus, which is why it was/is almost impossible for any government to deliver better results.
The relentless slide in oil prices seen in recent months is not helping. Slowdown in Pakistan’s manufacturing sector is due to weak demand at home and abroad caused by pandemic.
While, to avoid documentation, domestic market participants will continue to hesitate to purchase big ticket items. Getting waver for holding money without trail is almost impossible (courtesy FATF). Hence, increase in limit to buy product from Rs 50.000 up to Rs 100.000 without CNIC may not provide desired level of comfort to business providers, as long as buyer’s intention is to remain in hiding.
Let’s talk about allocated big numbers. The budget expenditure has been cut down by slightly over 10% versus previous budget (FY20).
As per budget allocation funding required to run the economy in FY21 is Rs 7294.9 billion. Tax Collection target for FY21 is Rs 4.963 Trillion. Another worrisome, but unavoidable expense amount is of Rs 2.946 trillion, which is projected in the current year’s budget to retire the principal amount and to pay the interest amount, which amounts to over 40% of the total outlay.
If we look at the noises frequently made around our borders and adjacent territories, projected funding of Rs 1.289 trillion allocated for Defense spending is quite normal. In Dollar term it is mere 2% higher than last fiscal, as prices of arms and ammunition equipment are mostly increased regularly in international market and are not purchased in Pak Rupee, whereas, depreciation of Rupee could easily distorts the budget allocation plan.
It is worth noting that projected budget deficit for FY21 by AZHAR is 7% of the GDP and has budgeted amount allocated is Rs 3.195 trillion. Calculation based on his projected numbers, in next fiscal year, Rupee should depreciate between 5% to 7%.
Further, budgeted growth projection of 2.1% will largely depend on combination of factors based on output/performance of manufacturing sector, recovery by service industry and domestic consumer spending. Agriculture sector has the ability to excel and can always bounce sharply if ample of liquidity is injected.
Locust, bad weather and flood remains a big threat that can play spoilers role. Mopping up of liquidity and injection (RS 1.66 Trillion) through Open Market Operation (OMO) encouraging banks to buy T/bills and Bonds (Rs 7.9 Trillion), which can exceed FY20’s target by another Rs 400 billion plus, could choke Private Sector growth, which will not only hampers GDP growth.
Such measures discourages new business openings. It is one of the major cause of unemployment and it also increases poverty. Clogging Private Sector growth also discourages Tax collection targets and it ultimately pushes Debt higher. Unfortunately the economy will soon be hitting 100% Debt to GDP ratio, which is already breaching 60% limit of the Fiscal Responsibility and Debt Limitation (FRDL) act.
Based on above budget announcement proposed Revenue Collection target of Rs 4.963 Trillion looks ambitious, unless more fiscal space is provided and budget deficit is allowed to hit and surpass 10% of the GDP. The heat of export slowdown will be felt in 1st quarter of new fiscal year. Hopefully import pressure will ease due to lower oil price, slowdown in machinery and transport group will be comforting factor or else 4% CAD could be tested.
Rescheduling of loans (Paris Club and other Donors) will only give temporary respite. Fiscal Policy surely lacks intention and aggression probably due to certain limitations.
One simple facts is that even if the Revenue Collection Target is met, the economy cannot repair the damage. Revenue Collection has to constantly hit Rs 8 trillion to Rs 10 trillion annually in continuation for next 3 to 5 years to overcome country’s economic needs.
(The writer is former Country Treasurer of Chase Manhattan Bank)
Disclaimer: The opinions in this article are the author’s and do not necessarily represent the views of Mettis Link News (MLN)
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