The mini-budget

For more than a month, there was a clamour over the arrival of yet another mini-budget, the third fiscal effort in the fiscal year. Curiously, when news of the mini-budget was first leaked, it was vehemently denied.

Subsequently, its admission was qualified as an effort to not raise taxes, but to give incentives to investors and take measures to ensure ease of doing business. More recently, it was categorically assured by the finance minister that the mini-budget would not be a revenue-mobilisation exercise.

The mini-budget did turn out accordingly. There is a negative tax effort, numerous concessions for businesses, incentives for investment, and ease for non-filers. It has left behind, however, a number of puzzling questions. Why was a well-established term like ‘mini-budget’ – reserved for additional tax efforts during a fiscal year –muddled for non-standard purposes? What was the urgency to take such measures as there was nothing that could not have waited for the regular budget, which is now due in less than five months? Did the economic circumstances warrant the measures announced in the mini-budget? We will attempt to answers these questions.

We surmise that initially there indeed was a thought to take the required tax measures to make up for the shortfall in the first six months in the revenue-collection target, which had swelled to Rs175 billion. The FM had hinted as much in a meeting of a Senate Standing Committee on Finance on December 19, 2018. “Yes, there is a proposal to increase taxes and tariffs as the current level of fiscal deficit was not sustainable, but nothing has been finalised yet,” he was reported to have informed the committee as part of a briefing on the status of negotiations with the IMF. He further said that the money bill would be presented in early January.

However, he soon retracted his statement as he realised that he would not have the necessary political support to take these measures. In a cabinet meeting on the following day, he disowned any suggestion of a mini-budget. Based on this, a spokesman of the government vehemently denied any news of the mini-budget. Interestingly, on December 9, 2018, the prime minister briefly visited Karachi where he met a delegation of the Pakistan Stock Exchange. The prime minister had acceded to the demands of the PSX, which primarily comprised corrections in tax anomalies.

There was, therefore, pressure on the FM to give effect to these measures immediately, which clearly required amendments in relevant tax laws. The PM used the occasion of the envoys’ conference to talk to a select group of economic correspondents and announced that the government would present a new mini-budget, which would give incentives to businesses.

Clearly, the FM was dissuaded from attempting to worry about economic adjustments. Instead, he was asked to give concessions to businesses, as promised by the prime minister during his Karachi visit. Once the occasion arrived, other things were added to the mini-budget to make it look like an exercise in reviving investor confidence and improving the ease of doing business.

To answer the second question, there was nothing in the mini-budget which could not have waited for the new budget. However, public attention was briefly diverted as it focused on the budget rather than the issues affecting the health of the economy.

We now turn our attention to the most important question regarding the affordability of the mini-budget measures as well as their contribution towards bringing economic stability. The mini-budget has taken the country further away from economic stability. The two central accounts of the country, fiscal and balance of payments, are in a precarious state. The six-month balance of payments is nothing less than a shocker. The current account deficit was lower by $370 million as compared with last year’s deficit.

Excluding official transfers, it was only $290 million less. But most importantly, if the increase in remittances was excluded, the current account would have been higher by more than $700 million. While exports were flat (despite a 30 percent depreciation), imports were up by three percent. The trade account, therefore, was higher by 5.3 percent.

This outcome can be understood when we look at the state of our fiscal account. We have already noted that there is a tax shortfall. If this is not made up for – which looks imminent – there would be a nearly one percentage point deficit from the revenue side. Things are equally precarious on the expenditures side, most notably from the rising debt-servicing costs. The policy rate increase of 350 bps will cost Rs847 billion in additional debt-servicing that is not fully accounted for in the current budget estimates – though some adjustment was made in the first mini-budget.

The growth in public debt between July and November at Rs2.2 trillion is about 10 percent, which is unprecedented. This comprises Rs1.2 trillion in exchange-rate loss on existing external debt and Rs1 trillion in deficit-financing. At this level of deficit in five months, the year-end deficit would be Rs2.4 trillion or six percent of GDP. Chances are that it would be significantly higher as no corrective measures are in sight.

Then there are other pressures on the budget that are not fully recognised. The FM said that nearly Rs3.5 trillion of unrecognised liabilities have been left behind by the previous government. Well, these cannot be wished away. The IMF was insisting that the government should either pass on the prices of utilities as determined by the regulators or put them in the budget. Those are still missing. This government has also contributed to giving unbudgeted subsidies on fertiliser imports, LNG and electricity use by the textiles sector and export rebates.

Viewed in this background, the mini-budget was a misplaced exercise as it contributed towards further worsening the already alarming state of the country’s economy. The strategy of the government, it seems, is to skirt the challenges and ease the payments pressure by using support from friendly countries. This is a myopic strategy, good perhaps for a government which may have only a year in office. It is hopeless for a five-year term. The painful and difficult adjustment is inevitable once these funds are exhausted, as we have seen with the Saudi money. The day of reckoning is not too far away, albeit it would be far more painful than today.

The writer is a former finance secretary.

Email: waqarmkn@gmail.com