Rising revenue risks

Pakistan’s fiscal miseries continue challenging policymakers and the latest is the billowing revenue collection shortfall, which if not made up for in time, is going to have adverse impacts for International Monetary Fund- (IMF) sponsored bailout package under Extended Facility Programme (EFF) worth $6 billion.

It’s becoming evident with every passing month the Federal Board of Revenue’s (FBR) desired tax collection target of Rs5,503 billion is totally unrealistic and unattainable and the government and IMF would have to revise it downward somewhere in the ongoing fiscal year.

During the first review talks, concluded last month, it was agreed, at one stage, the revenue collection target would be slashed down by Rs233 billion against Pakistan’s demand of Rs300 billion.

However, the fund team refused to give this concession to Pakistan on the eve of the first review because it must be hard for even the IMF team to sell out its programme before its executive board with adjustments in targets at a nascent stage. But it’s a fact it was a wrong assumption on both the IMF and Pakistani officials’ part that the revenue growth was targeted at over 40 percent when the economic growth was in strain owing to massive macroeconomic adjustments under the fund’s conditions.

With a nominal growth of 14.5 percent, the real gross domestic product (GDP) growth projection at 2.4 percent, and inflation hovering around 11 to 12 percent, the expectation of revenue growth in the range of 40 to 44 percent is beyond imagination.

Pakistani authorities argued compression reduced the import bill by $5 billion so the tax collected at import stage, about 50 percent, also faced the same dent so there was no other way out but to slash the overall target accordingly to adjust it in line with new emerging realities on the economic front.

The IMF is expected to dispatch its team for undertaking second review of its programme by February 2020 so Pakistani authorities will be making fresh requests to the fund team for revising the FBR’s collection target downward, while the non-tax revenue target might be readjusted upward to keep the fiscal deficit and primary deficit unchanged under the loan programme.

The FBR was facing massive revenue shortfall of Rs220 billion in the first five months (July-Nov) of the current fiscal year as it collected Rs1,608 billion against an envisaged target of Rs1,828.4 billion.

Faced with an increased shortfall, the FBR has been left with no other option but to request the IMF again for a relief in the annual collection target. The FBR has received 15,90,000 income tax returns so far against over 10,60,000 in the same period last fiscal year.

After the collection of Rs1,603 billion in first five months of the current fiscal year, the FBR will have to collect Rs3,895 billion in remaining seven months (Dec-June) period to display the figure of Rs5,503 billion on its collection board on June 30, 2020. It is a highly ambitious target so the FBR has started thinking to convince the IMF in the next review mission, expected to take place in the first week of February 2020, for easing this humungous task. The tax collection witnessed a shortfall of Rs220 billion mainly because of import compression of over Rs500 billion, so given the situation, it was amazing the FBR was achieving an overall growth in the range of 14 to 15 percent so far when the economic activities have come to a crawl.

The FBR has provisionally collected Rs325 billion taxes in November 2019 against the target of Rs381.4 billion, a shortfall of Rs56.4 billion just in one month.

Moreover, it provisionally received Rs1,608 billion during July-November FY20 against a target of Rs1,828.4 billion, reflecting a deficit of Rs220.4 billion.

During July-October FY20, the FBR had collected Rs1,283 billion against a target of Rs1,447 billion, which translates into a shortfall of Rs164 billion.

Around Rs1,380 billion were collected during July-November FY19, while in July-November FY20 the provisional collection was Rs1,608 billion, an increase of Rs228 billion (14.3 percent).

The tax body brought in Rs320 billion in October 2019 and has maintained overall increase of 16 percent over the last year and domestic tax over 25 percent. This was after taking into account the negative aspect of import contraction of around Rs50 billion.

Independent economists are suggesting the FBR could maximise its collection up to Rs4,400 to Rs4,500 billion in the current fiscal with its existing pace so a downward revision is on cards.

It’s just a matter of time when the government and IMF choose to concede this fact.

If it happens, then the ball will be in the court of ‘non-tax revenue collection’, which means the Privatisation Commission will be firing all its cylinders to get the job done in the months ahead.

The Pakistan Tehreek-e-Insaf-led government would have to materialise privatisation proceeds of certain important transactions down the line this fiscal year.

If these proceeds are not realised, the budget deficit might escalate in worse of ways, stirring up a storm that could actually sink the IMF programme in the months to come.

Pakistan had so far performed well for passing the first review as the IMF’s Executive Board was expected to take up Pakistan’s request for approving the first review and second tranche worth $445 million within the first two weeks of December 2019.

However, the government and its economic team will have to be extremely heedful while devising an effective fiscal strategy as wallowing over curtailing only current account deficit and extending greetings to each other is not going to help, because it also indicates the economy is slowing down, which is bad news for the fiscal front.

The FBR’s performance as well as the extent of non-tax revenue collection over next two quarters will determine the fate of the IMF programme as non-materialisation of revenues runs the risk of bringing it to a premature end after the second review, so careful analysis and timely action is advised.

The writer is a staff member