April 14, 2021: The Medium-Term Budget Strategy Paper for FY 2021-22 to FY 2023-24 has been formulated with a focus on sustainable growth, job creation, protection of vulnerable segments of society, inflation and price control, Prime Minister’s special initiatives, and reduction of twin deficits.
The basic strategy to achieve the objectives envisaged in the Paper is two-pronged. On the one hand, it encompasses optimal mobilization of revenue through broadening of tax base and increase in the tax net, removal of exemptions, simplification of procedures, and augmentation of the capacity of revenue administration, especially through IT-enabled services.
On the other hand, it is predicated on rationalization of expenditures without compromising the social and development priorities of the government, integrated with better public financial management. In the coming weeks, the government will seek input from all stakeholders on its taxation and expenditure policies to align them further with the imperatives of equitable, inclusive and sustainable economic growth. I would like to avail this opportunity to commend the team at the Finance Division and the Federal Board of Revenue for the hard work that has been done in the preparation of this Paper.
Pakistan’s economy is currently showing strong signs of revival after being hit very hard by the Covid-19 pandemic. At least three policy measures of the government warrant special mention here in terms of their decisive impact in mitigating the social and economic impact of the pandemic: ‘smart lockdowns’, the Rs. 1.24 trillion stimulus package, and the unprecedented concessions for the construction and SME sectors. In fact, it is because of these measures that Pakistan received international acclaim in managing the pandemic. Nevertheless, the successive waves of the pandemic continue to keep the economy subdued and below its potential level of income and growth.
The international outlook for the pandemic was for a turnaround by the middle of this year due to the start of administration of the Covid vaccine. However, the third wave and a new variant of the virus have raised significant concerns about economic prospects. The World Bank has downgraded its short and medium-term outlook for the World Economy, projecting worldwide GDP to grow by 4%, which is 0.2 percentage points less than in its June 2020 forecasts. The International Monetary Fund (IMF) is also of the view that the global economic outlook is still highly uncertain due to the intensification of the pandemic and divergence between rich and poor countries.
Inflation the world over remains volatile mainly due to supply-side disruptions and the impact of international commodity prices. In order to ameliorate the effect of international inflationary pressures, the government has maintained a policy of closely monitoring the supply and demand of essential food commodities as well as providing essential commodities at affordable prices through the support of existing mechanism like Utility Stores, Sasta Bazaars and subsidies on essential food items. It is expected that YoY inflation will be eased out in the coming months.
Fiscal indicators will continue to improve in the medium term, with optimal revenue mobilization and efficient management of resources. On the fiscal side, better management during LFY 2019-20, despite the adverse impact of the pandemic on revenues and expenditures, has been further consolidated during the current financial year. During the first nine months (three quarters) of FY 2020-21, the overall fiscal deficit remained on the lower side vis-a-vis the corresponding period of LFY 2019-20 (pre-Covid). During the same period, the primary balance has improved equally to 0.5% of the GDP, which shows more efficient fiscal management. This has been possible with better revenue collection by the FBR, prudent control of expenditures and efficient use of resources by the Federal Ministries and other organizations. The same momentum is likely to continue in the remaining period of FY 2020-21.
In the medium term (FY 2021-22 to FY 2023-24), the focus of fiscal policy will be on: sustainable, inclusive and equitable growth; job creation (1.2 – 1.9 million in medium terms); protection of vulnerable segments of the population; inflation control, and higher development spending. The envisaged economic growth will be driven by a sustained increase in the aggregate supply backed by a strong forex reserves position.
In view of the higher public sector expenditure needs, in particular, development spending, challenging revenue projections have been worked out in the medium term. At the same time, a minimal increase in non-development spending is envisaged along with prudent fiscal management in line with the Public Finance Management Act, 2019. The medium-term fiscal framework envisages the gradual reduction of the overall fiscal deficit from -7.4% of the GDP during FY 2020-21 to -4.4% in FY 2023-24. This reduction will correspondingly bring down the debt-to-GDP ratio and ensure the sustainability of debt.