The COVID-19 pandemic has gripped economies all over the world into its madness, causing a great degree of uncertainty as well as confusion as to how the affected economies will cope and recover from the same.
The virus, which is now present in every corner of the world, is spreading like wildfire in Pakistan, thanks to the untimely easing in lockdown by Federal Government which cannot afford to restrict business activities across the country anymore.
Likewise, the budgetary plans of Pakistan have been greatly affected, with the government’s focus shifted more towards how to pull the economy out of this dark pit. To discuss the same, Mettis Global recently held an online event that focused on Pakistan’s upcoming budget in a COVID-10 stricken world.
The event was graced by the presence of AWT Investment’s Country Head (Corporate and Institutions), Mr. Niran Rehman who was also the Session Moderator, with Former Secretary Finance, Dr. Waqar Masood, and Chairman of Optimus Capital Management, Mr. Asif Qureshi as guests.
The event started with discussions pertaining to the revenue collection of Rs. 4 trillion, which is what the government is hoping to close the financial year after easing in lockdown. The Session Moderator, Mr. Niran Rehman reiterated that IMF is likely to increase revenue collection target for FY21 by 34% of the current target in the negotiations, which are expected to take place after Eid.
Strictly calling them media speculations before commenting further, Mr. Rehman stated that the revised downward target of FBR i.e. 3.9 trillion for FY20 from 4.8 trillion after the contention with IMF, 34% of the 3.9 trillion is 5.2 trillion. Directing his question towards Former Finance Secretary, Mr. Rehman asked that is the government somehow manages to meet the target for FY20 by taking advantage of lockdown easing and rise in consumption activity during Eid, how the Government will plan to meet the target of Rs. 5.2 trillion in the next financial year.
To this, Dr. Waqar responded by stating that the chances of meeting the current year’s target are quite low, especially in the given circumstances, as most of the revenues are being collected from the activities which are severely affected by the lockdown. Considering this, the collection target of 5.2 trillion will be highly unrealistic, amid ongoing pandemic.
Due to this, Dr. Waqar said that the government cannot abandon combating the COVID-19 pandemic by focusing on an austerity budget. He said that the government should negotiate with IMF to put this program aside for the time being as topmost priority right now should be to fight against the virus.
When asked if this budget is going to be a demand-driven one, with contents contradictory to the extraordinary targets set by the IMF. Mr. Asif Qureshi said that the uncertainties pertaining to GDP and the complete opening of economic activity has made it difficult to predict or estimate reasonably anything right now.
However, he said that around this time, revenue collection will be directly linked to the progress of nominal GD, real GDP, and inflation outlook. As per the estimates, the real GDP is likely to show a negative growth of 1.5%, if this estimate is correct then FY20 is going to be the first fiscal year after 1952 to record negative growth in real GDP. Keeping all these factors in mind, any relief provided from the fiscal side without any external grants will be quite difficult, and to achieve any double-digit revenue growth target will be near to impossible.
The Sessions Moderator then shed some light on how the demand-driven budget has drawn several unprecedented proposals from the industrial sector, such as a reduction in sales tax from 17% to 5%, implementation of zero-rating for foreign export-oriented sectors, reduction in local sales and the withdrawal of CNIC condition for traders. He then solicited views on the government should take these measures to generate demand, and if yes, then how.
To this, Dr. Waqar said that in the current situation, the most government can do is increase the purchasing power of the consumers and create breathing space for businesses. He said that so far, the government had been managing well as it has successfully rescheduled loans, introduced payroll financing scheme, and provided relief of 3 months in payment of electricity bills to SMEs. Having said that, the government should not distort the reforms that it previously had made by reducing sales tax from 17 to 5%, as it will result in a massive revenue loss.
When asked if there was any possibility of generating demand using fiscal policy, Mr. Asif Qureshi said that as of now, there was zero possibility of any further relief in terms of lower taxes or higher development expenditures, given that the country is cuffed in the IMF program. The only possible relief, according to him, would be made possible by the Central Bank in terms of lower interest rates. He said that the current interest rate of 9% was not sufficient to stimulate demand in the situation, especially when the economy is encountering multiple challenges.
Mr. Niran Rehman also spoke at length about the likelihood of a downward revision in the envelope size for development to Rs. 600 billion for FY21, i.e. 101 billion or 14.4% less than the original budget of the FF21, is being considered to generate further demand. When asked if this amount was very low compare to the last three fiscal years, Dr. Waqar said at the moment, the government does not have many resources, and it’s better to focus more on small development schemes so that employment can be generated.
When asked for suggestions to improve the EODB issue and fill any loopholes in it via the upcoming budget, Mr. Asif Qureshi stated that the structural weaknesses of the fiscal framework must be addressed, such as the joint responsibility of the Centre and the provinces in public debt and electricity. These two expenditures are a part of the federal government book, so there should be better expenditure sharing between federal and provinces, he added.
‘For ease of doing business, we should review the current taxational policy framework as electricity is critical for manufacturing and electricity tariffs in Pakistan are one of the highest in the regions. Despite this, the burden of circular debt is continuously rising and there is pressure from IMF to further increase the tariffs, thus, we should address issues on the energy front in this budget’ he further added.
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