Governments usually breathe a sigh of relief once the annual budget is passed. Yet even though this year’s finance bill was accepted without much opposition from opposition benches when it finally came time to vote, Finance Minister Shaukat Tarin wouldn’t be as relieved as usual just yet. The reason, of course, is that the real test has just begun. Because the government now has two months to impress the International Monetary Fund (IMF) with the sudden turn around to a very expansionary fiscal policy, failing which it will most likely be curtains not just for the new budget and the new finance minister, but also the economy and the ruling setup.
In short, the budget is ambitious with respect to projected development spending and revenue targets. And if they can’t collect enough revenue how will they finance all the development? There’s also the prospect of the bureaucracy slowing Public Sector Development Program (PSDP) spending because of the fear of NAB investigating its initiatives. This will need to be checked and if ministers are unable to keep the civil service in check and make it deliver, then they will fail the budget test.
A few things, therefore, will be very important.
One, it is strange that the IMF was fine with such outright rejection of clauses that the government had accepted when it signed up for the Extended Fund Facility (EFF) almost two years ago. This particular bailout program was what they (at the Fund) call “front loaded,” which means the recipient country would have to agree to all terms before disbursement of bailout dollars, or even Special Drawing Rights (SDRs), in some cases. It was precisely this point that froze the program for a whole year because Prime Minister Imran Khan simply refused to raise taxes and gas tariffs in light of the overall political situation. And it wasn’t until the PM took a U-turn on the matter that the second to sixth tranches were released. However, in a very short span of time we had a new finance minister and a completely new plan, which defied the IMF’s contractionary high taxes, high interest rate, low government spending mantra. And, for some reason, unlike before the Fund agreed to wait and see how things go for two months before deciding about the fate of the lending facility.
Two, why give it only two months? Surely, considering the lags between policy implementation and results, they need at least a quarter or two before IMF has the numbers to decide about the future. It would have helped if the government or the Fund had elaborated a little about just what indicators they are going to watch over the next two months and what sort of numbers they would need to see before accepting Finance Minister Shaukat Tarin’s turnaround plan. Is it tax collection, development spending, something about the circular debt, or just the old feel-good factor, if there is such a thing?
Three, it’s not like the IMF wouldn’t have noticed that we’re not too good at meeting any important target that we set in the budget; no matter which party is in power. Last year’s Public Sector Development Program (PSDP), for example, was originally set at Rs650,000 billion, and then revised down to Rs630,000 billion, yet they had only spent about Rs390 billion in the first three quarters. It doesn’t take a finance minister to put two and two together and realise that even the revised estimate would not have been met by fiscal year-end. So while the next year’s target of Rs900 billion is as inviting as it is ambitious, the proof of the pudding will lie in the eating. Hopefully the finance ministry will be a lot more transparent than last time about how it intends to make sure we reach the targeted amount this time.
Four, pretty much the same is also true for revenue. Last year’s target was Rs4,963 billion, revised estimate was Rs4,691 billon, and the final fiscal-end figure was Rs4,732 billion.
The prime minister is very happy that the Federal Board of Revenue (FBR) was able to beat the revised estimate, but it was still short of the original target. Next year’s target is Rs5,829 billion, which naturally begs the question of how to generate such large sums when smaller ones have eluded us all this time. And with the budget standing out for reducing taxes and increasing subsidies, if the projected revenue is not achieved how will the ambitious development budget be financed?
And five, while the commerce minister is understandably over the moon because exports clocked in at $25.294 billion in FY21, up 18.2 percent from the previous fiscal’s Rs21.394 billion, the other side of the picture is more than a little sobering. That is because when our economy grows and pushes up exports, it also inflates the import bill because of the need to import machinery and equipment to feed into that growth. So is it really a surprise that the trade deficit also grew by 32.9 percent in FY21, with the import bill jumping 25.8 percent over the previous year?
Granted, higher imports also fetch more customs duties and put more lipstick on revenue, but the government needs to be transparent about the cost-benefit ratio of this arrangement, especially since the Fund is looking and everybody needs clarity on the more important points.
Getting the budget passed, then, could well turn out to be the easy part. From the looks of things the government has put all its eggs in the new, pleasant budget. But nobody has yet dared to talk much about what will need to be done if the Fund is not happy with what it sees in the next two months. That is why all eyes are now on the finance ministry and it would help everybody, including itself, if it clarified early on which indicators will make the difference when it comes to getting the IMF’s nod.
