Economic scorecard: Part - II

In my last article (‘Economic scorecard’, June 25, 2019), I had reviewed the economic performance during fiscal year 2018-19. In this regard, some more information has now become available. This makes the picture of the economy grimmer.

Early reports indicate that the FBR has collected only Rs3760 billion in taxes during FY2019. This means that the tax collection has fallen short of the target by Rs640 billion relative to the original budget target of Rs4400 billion. The revised target for taxes in the budget documents was shown at Rs4150. Even relative to this target, there is a shortfall of Rs390 billion. More importantly, last year tax collection had amounted to Rs3842 billion and thus there is a negative growth of two percent compared to last year. This has never happened in the country’s history. It is truly a major crisis, which, if not corrected, could permanently impair the country’s fiscal system.

Tax to GDP ratio has fallen to 9.75 percent, which is a very poor performance. Yet in the new budget we have pitched to raise the tax-to-GDP ratio to 12.6 percent. In terms of nominal numbers, the FBR target of Rs5550 for the next year would call for additional revenues of Rs1790 billion, which looks even more difficult compared to the budget estimate.

Curiously, the above figure of tax collection also includes Rs36 billion, reportedly received under the tax amnesty scheme.

Interestingly, last year also there was an amnesty scheme. The additional revenues the previous scheme brought in taxes amounted to Rs92 billion, which means the collection of Rs36 billion under the new scheme is only one-third of the previous scheme. This poor revenue outcome of the scheme is therefore not very encouraging, especially after the benami prohibition law the new scheme was supposed to elicit much large disclosures. There was much publicity of the scheme, together with repeated exhortations to the public on live TV by none other than the prime minister himself who also addressed the nation on the subject three times. After refusing it initially, the government has extended the deadline for filing under the scheme until July 3. If the scheme doesn’t meet the expected success, it would adversely affect the revenue collection efforts.

The implications of poor revenue performance – for the IMF programme – are substantial. At the outset, the IMF could justifiably demand a larger tax effort than the one included in the budget to compensate for the lesser actual tax collection. But more importantly, going forward, a tougher job is in hand regarding tax collection. Therefore, the outcome of the first quarter of the budget would be extremely important for the security of the programme. A shortfall in the first quarter would definitely call for additional mid-term measures which would be hugely unpopular and next to impossible for a political government.

We now turn to another important data regarding the large scale manufacturing (LSM) during the 10-month period Jul-Apr in Fy2019. The overall output was down by 3.6 percent. The decline has accelerated of late. The year-on-year change in April was 7.6 percent and month-on-month between March and April was 9.4 percent. At the time of announcement of the national accounts in late April-early May, it is the Jul-Mar number that is available for estimating the revised growth rate. During the Jul-Mar period, the decline was 2.93 percent.

What this means is that the revised growth of 3.3 percent in the national accounts was over-estimated as it used a relatively high number than the actual number in April. More significantly, there is no reason to believe that this rapidly declining growth rate would turn positive anytime soon. Accordingly, the growth rate for the year would be less than 3.3 percent based on the revised numbers, which is also consistent with the forecast of the multilateral institutions.

The decline in LSM production compared to last year is broad-based, covering all important sub-sectors. Electronics (17.2 percent), iron and steel (11.0 percent), automobiles (9.4 percent), pharmaceuticals (7.33 percent), food & beverages (7.0 percent), petroleum products (6.3 percent), cement (4.4 percent) and textiles (0.3 percent) are some of the leading sectors that suffered decline at the rate shown in parentheses.

A turn around in this performance doesn’t look imminent as many sectors have reportedly threatened strikes (textiles, iron and steel) in case the proposed taxation measures announced in the budget are not withdrawn. They claim that their economics has been adversely affected by these measures. The decline in cement and iron and steel is ominous as it is indicative of the broader slow-down in the economy. The massive cut in development spending is the leading cause for reduced demand for such basic construction materials as cement and steel.

In another major development, economic sentiments were deeply affected by disorderly developments in the exchange market during the last week. The depreciation of the Pak rupee by Rs7 in a single day was never thought to be on the cards after the governor had assured the nation in his maiden press conference on June 17, 2019 that, while encouraging a market-based exchange rate (and not a floating exchange rate), the central bank would not allow untoward behaviour in the market. He also announced that all the prior actions for the Fund programme were completed, thus sending the signal that until at least a quarter no further economic adjustment in exchange rate and interest rate was warranted.

Yet, this unanticipated depreciation took place. But by Friday the rupee regained half the loss. In the process, the market was jolted and agents remain unsure as to what happens next. The lack of information about the causes of such volatility have damaged the evolving stability that was slowly emerging after the Fund program.

Undoubtedly, the country is passing through very difficult times. People are giving the required sacrifices, willingly or unwillingly, as they have accepted the budgetary measures. But management failures would have to be avoided to give people the confidence that only exogenous factors are responsible for this difficult phase.

Concluded

The writer is a former finance secretary. Email: waqarmkn@gmail.com