Hyping hollow hopes

The government is swearing the prevailing economic crisis will come to a “happy end” in a little over next two months, a ‘tour de force’ that it is in no position to pull off without either a stroke of extraordinary luck or some occurrence that is no less than a miracle. However, nobody exactly knows why they are stoking hopes that are unrealistic, undeliverable, and unachievable, that too with the enthusiasm of a Ponzi scheme team. Contrary to this claim, Federal Minister for Finance Dr Abdul Hafeez Shaikh on Saturday unveiled a future road-map for achieving stabilisation over the next fiscal year, which is wrapped in austerity, fiscal consolidation, and revenue mobilisation in a big way. First of all this government does not have any effective communication strategy to explain its narrative on economic front. This gap has been increasing with every passing day. The uncertainty is on the rise because most of the economic team members have been shown the door. The new squad is being built up because this regime does not like dissenting views during the process of policy formulation. The economic projection approved by the Annual Plan Coordination Committee (APCC) last week and now National Economic Council (NEC) will tell an altogether different story this week. The government has set the gross domestic product (GDP) growth rate target at 4 percent and inflation at 8.5 percent for next financial year 2019-20, clearly indicating there are projections of a slowdown in economic activities and job creation, while mounting inflationary pressures would shove millions more under the poverty line. A country’s entering into an International Monetary Fund (IMF) bailout agreement is suggestive of the fact that its economic fundamentals are not in good health and the lender acting as “financial physician” after a detailed diagnosis will definitely prescribe measures like tightening of monetary and fiscal policies under the stabilisation program to curtail the demands in the economy. So the first victim during the stabilisation period will be of course the growth rate of the country. The monetary tightening has already been done as the recent hike of 150 basis points has jacked up the discount rate to 12.25 percent from 10.75 percent. The State Bank of Pakistan had hiked its discount rate by 6.25 percent in last more than one year period on the pretext of rising inflationary pressures. The headline inflation measured by Consumer Price Index (CPI) in April 2019 shown an increase of 8.8 percent, which is lower than 9.4 percent recorded in March 2019 but higher than 3.7 percent observed in April 2018. The food component continues to lead the inflationary pressures as it increased by 8.6 percent, which is high, especially taking into account its level of 0.9 percent four months ago in December 2018. Non-food component after staying in double digit for three consecutive months eased to single digit at 9 percent. It has been continuously showing a downtrend since January 2019. The policy induced inflation, also known as the core one, has been on the downward adjustment path for the last 3 months and decreased to 7 percent, which was exactly the level of April 2018. In March 2019 the core inflation had increased by 8.5 percent. Traditionally, every year, the month of April is the ‘bad month’ for the incidence of inflation and a buildup of 1.3 percent in April 2019 is one of the lowest since April 2013. Food inflation always tends to remain high in April of every year because of traditional supply breaks in especially for fresh fruits and vegetables. Due to beginning of new session in schools text books, stationary, and other education-related expenses also have the highest impact in April of every year. These are April-related factors for incidence of inflation apart from other factors. The incidence of inflation averaged 7 percent during July-April 2018-19, as compared to 3.8 percent in the comparable period of last year. Food inflation averaged 3.8 percent in this period, compared to 2.1 percent last year. Non-food inflation averaged 9.2 percent as against 5.2 percent last year. Core inflation averaged 8.1 percent, compared to 6.1 percent of last year. The immediate inflationary pressures are normally tracked through month-onmonth changes in CPI index. On food side, inflationary pressures have eased from 2.9 percent in March 2019 to 1.7 percent in April 2019; however, they increased in case of non-food (from 0.5 percent to 1 percent) and the core inflation (0.7 percent to 1 percent). The rise in other inflation indicators like Sensitive Price Indicator (SPI) and Wholesale Price Index (WPI) does not augur well for future prospects of the inflation. The SPI and WPI increased to 9.3 percent and 13.8 percent in April 2019, compared to 8.8 and 12.6 percent in March 2019 respectively. On month-onmonth basis, the SPI increased 0.9 percent, compared to 1.6 percent in previous month, while the WPI stepped up 2.3 percent, compared to 1.7 percent in the previous month. Now on fiscal front, the IMF is calling for tightening the fiscal position under its bailout package, whereby Islamabad will be asked to slash down the budget deficit from highest level of over 7 percent of the GDP for the outgoing fiscal year 2018-19. The budget deficit is all set to escalate to 7.5 percent of the GDP for the current fiscal year as it had already touched 5 percent of the GDP for the first nine months (July-April) of the ongoing fiscal. The budget deficit in absolute figures crossed Rs1922 billion-mark and is all set to touch Rs2.8 trillion to Rs2.9 trillion till end-June 2019. For steep adjustments on fiscal front the government is left with no other option but to raise both tax and non-tax revenue big time. The IMF has asked Islamabad for jacking up tax-toGDP ratio and fixing the tax collection target at Rs5,550 billion, against revised estimates of Rs4,100 billion. The IMF is simply asking for a 36 percent growth in the revenues at a time when the board could only achieve just 2 to 3 percent growth, so far, in outgoing fiscal year. Different options are under consideration for increasing tax revenues but it is yet to be seen how much the government will be able to sell it politically. The major exemptions that could be abolished include zero-rating on five export-oriented sectors including leather, textile, carpets, surgical, and sports goods, while the special mechanism of tax collection for steel sector could also be done away with. The problem is the finance ministry has estimated the Federal Board of Revenue (FBR) could collect Rs4,241 billion or 11 percent of the GDP but the board’s own assessment showed that its collection could touch Rs4,125 billion or 10.7 percent of the GDP till end-June 2019. Even after the fresh amnesty scheme, it is yet not known how many people are availing this scheme, how many of them would prefer to pay due amount along with declaration, and how many would prefer to pay the penalty for paying their taxes in the next fiscal year. The revenue target will be set on the basis of a nominal growth of 12.5 percent including real GDP growth rate of 4 percent and inflation target of 8.5 percent. Then the FBR will propose three to four options related to taxation measures for the next budget for presenting before the political masters to choose one or a combination of measures that suits them politically to sell out to people of Pakistan. The tax machinery would have no other choice but to propose taxation measures to net additional revenues in the range of Rs750 billion in the upcoming budget. “The choices are limited,” they (officials) argued and maintained that the harmonisation of taxation among the federation and provinces and some innovation would be required to jack up stagnant tax-to-GDP ratio over the next three years and its first phase would be implemented through upcoming budget for 2019-20. The writer is a staff member 

from The News International - Money Matters http://bit.ly/2WqDYeZ