Three important developments have taken place on the economic front. The first is related to moving towards signing an agreement with Independent Power Producers (IPPs) for introducing major changes in power purchase agreement (PPA), which might reduce the power tariff in future. The second is the release of fiscal operation for end June 2020, which shows that Islamabad managed to restrict its budget deficit at 8.1 percent of gross domestic product against International Monetary Fund (IMF) projections of 9.3 percent of GDP for last fiscal year. The third development is that the Parliament passed five bills in order to fulfil the conditions of the Financial Action Task Force (FATF) in a bid to come out of the grey list.
Three important developments have taken place on the economic front. The first is related to moving towards signing an agreement with Independent Power Producers (IPPs) for introducing major changes in power purchase agreement (PPA), which might reduce the power tariff in future. The second is the release of fiscal operation for end June 2020, which shows that Islamabad managed to restrict its budget deficit at 8.1 percent of gross domestic product against International Monetary Fund (IMF) projections of 9.3 percent of GDP for last fiscal year. The third development is that the Parliament passed five bills in order to fulfil the conditions of the Financial Action Task Force (FATF) in a bid to come out of the grey list.
All these developments are welcoming signs, but none of these steps will help convince the IMF or the FATF about the government’s commitments if the approach to implement these legislative changes and agreements remains lacklustre. Effective enforcement will be the key of success on the economic front on a sustained basis.
These developments on the economic horizon of the country could pave the way for the revival of the stalled $6 billion IMF programme under the three year Extended Fund Facility (EFF). On the power sector front, Prime Minister Imran Khan shared good news with the masses by stating in a video message that as a result of an agreement with the IPPs, power tariff will come down for the industry, while the masses will also benefit from it.
In a nutshell, the rate of equity (ROE) for foreign investment is fixed at 12 percent and local equity at 17 percent at rupee-dollar parity of Rs148 for the future with no dollar indexations. The lower ROE for both local and foreign investors’ mean slower increase in tariff going forward. This is not the final agreement as clause 10 clarifies that the main outstanding issue was the payment of receivables of the IPPs, which is an integral part of this MoU.
Power Purchase and government of Pakistan would devise a mechanism for payment of the outstanding receivables within an agreed timeframe, which would be reflected in the final agreement, yet to be signed. The tariff would not be affected from the current level, but the future capacity payments would be lower. The final agreement would help exactly estimate how much power tariff would come down in future.
The second favourable development, as stated was the curtailment of the budget deficit. The government was able to curtail it at Rs3,376 billion, equivalent to 8.1 percent of GDP against projection of 9.1 percent of GDP for the last fiscal year ended on June 30, 2020. The government was able to restrict the budget deficit at desired level because of two major factors. One was reduced debt servicing, because of lower mark up rates, while the second was that the government could not fully utilise the stimulus package of Rs1.2 trillion.
Against budgetary estimates of Rs2,891 billion for mark-up payment of foreign and domestic loans, the actual utilisation of debt servicing remained at Rs2,619 billion, thus Rs272 billion was saved from this head. The second major saving came from the inability of the government to fully utilise Rs1,240 billion stimulus package announced to mitigate the effects of COVID-19 pandemic. If these two heads would not have been curtailed then the budget deficit might have gone close to 10 percent of GDP for last fiscal ended June 30, 2020.
The budget deficit ultimately increases the burden of debt and liabilities, and is all set to cross 100 percent of GDP when the final figures for 2019-20 are released by the State Bank of Pakistan in days to come. The government fetched additional non tax revenues through petroleum levy and earned Rs293.6 billion in last fiscal year.
The government claims it is an achievement of the incumbent regime for restricting the budget deficit at 8.1 percent of GDP, but in absolute terms the budget deficit remained second highest in the country’s history. The PTI-led government jacked up fiscal deficit to a record high of Rs3,444 billion in the first year of its rule in 2018-19, when it touched 8.9 percent of the GDP.
Primary deficit that was considered one of the major conditions under $6 billion Extended Fund Facility of the IMF programme for Pakistan was kept at Rs756.81 billion or 1.8 percent of GDP during the last fiscal year 2019-20, against the Fund’s projection of negative 3.1 percent of GDP. There is another worrisome development. Statistical discrepancy increased to Rs89 billion in fiscal year 2019-20 against Rs22.4 billion for 2018-19, indicating that it went up despite having a meagre amount in overall massive budgetary numbers, which ran into trillions of rupees.
However, development spending both at federal and provincial levels remained lower, as federal Public Sector Development Programme (PSDP) utilisation stood at Rs467 billion and provincial spending was recorded at Rs641 billion.
According to a presentation given by the prime minister’s finance adviser before the federal cabinet, the total revenues were Rs6,272.168 billion, including tax revenues of Rs4,747 billion and non tax revenues of Rs1,524 billion. The Federal Board of Revenue’s collection stood at Rs3,997.921 billion in the last fiscal year 2019-20, while all four provinces collected a meagre amount of just Rs413.617 billion.
Out of total non-tax revenue collection of Rs1,524.366 billion, the federal government collected Rs1,421.977 billion while provincial governments fetched Rs102.3 billion.
Total expenditures of the country consumed Rs9,648.488 billion in last fiscal year out of which the current expenditures utilised a major chunk to the tune of Rs8,532.02 billion. The federal current expenditures consumed Rs6,016.19 billion while provinces utilised Rs2,515.8 billion on current expenditures.
Finance Ministry stated that remittances remained at all time high despite COVID-19. The PSDP utilisation went up as Finance Ministry dispensed with the requirement of ways and means.
Meanwhile, the highest refunds were paid as the government ordered release of Rs40 billion refunds last Monday. Current Account Deficit was brought down too from $20 billion in 2018-19 to $3 billion in 2019-20. Foreign currency reserves increased from $8.5 billion to $12.5 billion held by the SBP.
Thirdly, the government managed to get stamped approval of FATF-related legislations from the Parliament. It is yet to be seen how the FATF review responds on these developments in its next meeting expected to be held in October 2020.
This momentum needs to be translated into more actions on the economic front in order to revive GDP growth so that some relief can be guaranteed for the masses.
The writer is a staff member
