Looking at the ruckus in the National Assembly at the start of the budget session, many had thought that the government would find it extremely difficult to get the Finance Bill 2021-22 passed. However, the finance minister addressed the opposition’s concerns by withdrawing almost all the controversial budget proposals: powers of the FBR to arrest tax evaders, tax on medical bills reimbursement, internet, and zero-rated regime on dairy, etc. In apparent reciprocity, nearly two dozen members of a major opposition party remained absent from the house at the time of voting on the finance bill. Resultantly,the government got a walkover and managed a smooth approval of the budget.

One has to admit that the budget, after the incorporation of the opposition’s suggestions, could not have been better under the given circumstances. The ground realities have not changed much for the last five decades. Each fiscal year starts with plans for more spending than the expected revenues. The fiscal deficit is met through internal and external resources (read loans). New loans are sought to pay the previous debts.

This year too, the federal government, with Rs 4.49 trillion in its pocket (after paying the provincial share from the federal divisible pool), is aiming to cater for an expense of Rs 8.48 trillion. This means that the fiscal year started with a deficit of Rs 3.99 trillion. The government can compromise on one source of revenue but would have to compensate the loss from another head, borrow more, or curtail its expenditure to remain within the fiscal deficit target.

Finance Minister Shaukat Tareen has managed to send positive vibes to all sectors of the economy, i.e., manufacturing, services and agriculture. The budget has been called a confidence booster, and its approach not to use commerce and industrial policies as revenue collection tools is widely appreciated. The good feeling is not confined to the industrial sector. Big businesses and corporate houses are also happy with some of the budgetary measures. Relief for cars (up to 1,000cc) in the budget got extended to big cars as well due to a progressive auto (vehicle) policy.

Agriculture, too, is on policymakers’ radar. The prime minister is giving special attention to food security and transformation of agriculture. Considering that agriculture is a devolved subject, the federal government has used its influence on the Punjab and the KPK to allocate substantial amounts for agriculture in their budgets.

In the social sector, the focus is on social safety nets (with a record allocations for Ehsaas initiatives), Covid-19, health (steps towards universal health insurance provisions through federal and provincial budgets) and afforestation/climate change. Compared to last year, the PSDP allocation has increased and there is a renewed focus on utilising the funds effectively. An increase in minimum wages and salaries/pensions for government officials, subsidised loans for SMEs, low-cost housing, farmers and the youth are commendable measures.

On revenue collection, the finance minister seems to have adopted a dual strategy. First, to reduce the cost of doing business and improve ease of doing business. These measures will enhance economic activities that will increase the size of the pie for tax revenue collection. Second, he sounds committed to broadening the tax net through data, technology, and administrative measures.

The bad news is that some of the feel-good factors in the budget, especially small loans on subsidised markups for the masses and the SMEs, will not get disbursed due to institutional inertia. Our commercial banks are not tuned to serve the credit needs of small account holders. Their reluctance to provide housing loans is a major hurdle in the success of PM’s small housing scheme. The SMEs, farmers and the youth will face similar problems in availing of subsidized loans.

Another bad news is that the budget may not contain inflation. An increase in demand, especially for oil is affecting prices. The experts are already warning of inflation in the developed world and stagflation in the developing world.

Between October 2020 and January 2021, global petroleum prices went up by 32 percent; soybean oil prices rose by 70 percent and palm oil by 20 percent. The prices of refined sugar, pulses and tea increased by 56 percent, 32 percent and 6.6 percent, respectively. Since we are dependent on imports to meet our demands for edible oil, pulses, and tea, their global prices affect their selling prices in Pakistan.

The government is trying not to pass on the entire impact of international oil prices to domestic consumers. However, there is a limit to what it can absorb. If the Saudi Arabia-UAE dispute on increasing the supply of oil by OPEC (plus Russia) continues then the oil prices may touch $90 per barrel over the coming months. The government will then have to raise the petroleum prices. Any increase in petroleum price will trigger cost-push inflation. Moreover, with no cushion to apply additional levy, the government may miss its budgeted petroleum levy revenue target of Rs 610 billion. The deficit will either be compensated through other taxes or increase the fiscal deficit.

A hike in crude oil prices will also affect the rates of gas and furnace oil. This will jack up the cost of electricity generation. The IMF is already asking Pakistan to contain its energy circular debt by increasing electricity tariffs. Higher energy cost will have a ripple effect on inflation.

A factor responsible for food inflation is the fluctuating prices of perishable commodities, such as tomatoes, onions and other vegetables and fruits that keep changing with their supply. Due to a lack of storage facilities, they are sometimes sold below their cost of production when their supply is abundant. Their prices rise steeply when their supply dries up. Although there are concessions for silos manufacturers and allocation for warehouses in the federal budget, during 2021-22, prices of perishable food items will continue to fluctuate.

The Rs 10 per kilo and Rs 15 per kilo increase in support price of wheat in the Punjab and Sindh, respectively, will cause a proportional rise in wheat’s issue price to the flour mills. This will mean an increase in wheat flour prices too.

The government may not contain inflation. However, it can control exorbitant increases in prices through better governance and the use of data and technology to curb hoarding. The government has tried to improve the purchasing capacity of the consumers in the federal budget. Payments provided through the Ehsaas programme, an increase in minimum wages and an increase in salaries and pensions of government officials are steps in that direction. It is also planning to shift to targeted subsidies (through technology and data), departing from the existing across-the-board subsidies model. Improved social safety nets and a targeted subsidy regime will provide significant relief to the most marginalised groups. However, during this transition, the middle-income earners will suffer.

The finance minister has prolonged Pakistan’s negotiations with the IMF. It seems that the sixth and seventh review of the Fund for release of subsequent tranches will be clubbed together and take place at the end of September, i.e., at the end of the first quarter of this fiscal year.

The next three months will be crucial for Pakistan to prove to the IMF that its strategy for revenue collection is effective. If we can achieve the revenue targets for the first quarter of the year, it will be easier to persuade the IMF that we should be allowed to fulfill the programme conditionalities at our own pace and sequencing.

The writer heads Sustainable Development Policy Institute. He tweets at @abidsuleri