Budget for fiscal year 2019-20 was reminiscent of measures favoured by previous finance ministers particularly Ishaq Dar: it fully met the precise prior International Monetary Fund (IMF) condition of achieving a primary deficit of 0.6 percent of Gross Domestic Product (the other two conditions notably a market based exchange rate and raising the discount rate have already been implemented by the State Bank of Pakistan) however there were re-adjustments of allocations under different heads as well as discrepancies in data between what was clearly for domestic consumption and what was for the IMF.
There is ongoing debate on whether the targeted primary deficit would be met only on paper or whether it would actually be achieved given the unsynchronized raw budget data from three sources – (i) the budget speech delivered by Hammad Azhar, the Minister of State for Revenue though with major input from the Advisor to the Prime Minister on Finance Hafeez Sheikh, (ii) the budget documents prepared under the directives of the Advisor, and (iii) the laminated three-page booklet titled Federal Budget 2019-20 Press Brief with new budgetary measures released the day after the budget speech during the post budget press briefing which was led by Hafeez Sheikh with the usual four suspects in attendance (Umer Ayub, Minister of Energy, Hammad Azhar, Syed Shabbar Zaidi Chairman Federal Board of Revenue (FBR) with Khusro Bakhtiar, Minister for Planning , Development and Reforms alternating with Razzak Dawood Advisor to the Prime Minister on Commerce and Industries).
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However, the budget speech and the press brief have similar data given that their target audience is probably the Pakistani public while the budget documents appear to be for IMF consumption given that in its 12 May press release it was unambiguously stated that: “the forthcoming budget for FY2019/20 is a first critical step in the authorities’ fiscal strategy”.
This may explain why (i) the budget speech and the press brief mention 4 percent growth rate while the documents put it at 2.4 percent; the lower growth will have implications on all major macroeconomic indicators including revenue and industrial growth projections; (ii) the inflation rate is given at between 11 and 13 percent in the budget documents for next year, while the press brief refers to medium term inflation target, the time period is defined, as opposed to a projection, in the range of 5 to 7 percent; (iii) 193 billion rupees budgeted for ehsaas programme is not, as was the practice in the past, placed under development expenditure outside PSDP but under grants and transfers (a component of current expenditure) with Benazir Income Support Programme (BISP) budgeted at 180 billion rupees, poverty alleviation fund at 2.15 billion rupees and grant to Baitul Mal at 5.6 billion rupees for next year. No revised estimates were provided for the current year with respect to BISP and the poverty alleviation fund (so no comparison with the budgeted allocation for next year) and 5 billion rupees were noted as released during the current year for Baitul Mal. The remaining 5 billion rupees allocation is to be from miscellaneous grants, sources informed the Business Recorder, which is budgeted at 84 billion rupees for next year. Given that total allocation for grants and transfers would constitute around 10 percent of total current expenditure the Centre’s claim that it does not have sufficient funds for development, repeatedly highlighted by the Prime Minister and the raison d’etre for his high powered commission to determine who is responsible for raising the loan repayment component of budgets, is further strengthened. It may be recalled that Dar readjusted items taking from non-tax revenue to tax revenue to show better performance than was in fact the case while Dr Hafeez Sheikh reduced the food component in calculating inflation by 6 percent thereby reducing the rate of inflation with a stroke of the pen; and (iv) development expenditure allocation for the current year is 500 billion rupees as per the budget documents however the Ministry of Planning website gives total releases till end May 2019 at 100 billion rupees more.
To compound the uncertainty prevailing in the country as to which data best reflects the government’s intent is the dollar-rupee parity used to calculate the mark up on foreign loans and project customs revenue. Informed sources in the Federal Board of Revenue told Business Recorder that they had no knowledge of the rupee-dollar parity used however a senior FBR official inexplicably stated that the amount was determined in rupees and not dollars. During the post budget briefing this question was again put forward and Shabbar Zaidi, FBR Chairman, stated that the parity used was the prevailing rate at the time of the budget, as is the usual practice, a statement that was visibly supported by Hafeez Sheikh. However given that 2 billion dollars is maturing under eurobonds/sukuk and the Saudi oil facility is 3.2 billion dollars the budgeted allocation of 300 billion rupees and 480 billion rupees respectively leads one to conclude that the parity used is 150 rupees to the dollar. This rate would obviously not be acceptable to the IMF given that the bid interbank rate on Friday was 155.75 while the offer was higher at 156.25 rupees to the dollar. Rumours are circulating in the capital that the rate that would be shared with the IMF may well be close to 165 rupees to the dollar – a rate that Asad Umer has claimed in private meetings that he was trying to negotiate downward.
Be that as it may, higher rupee-dollar parity would, without doubt, raise the budgeted mark-up payable next year and lower customs revenue accounting for a higher budget deficit which in turn would seriously compromise the government’s ability to meet the prior condition of a primary deficit of 0.6 percent of GDP.
External borrowing is budgeted to rise by 121 percent next year compared to the outgoing year and, most disturbingly, reliance on commercial banks (at high rates of interest and small amortization period) is budgeted to rise from the revised estimates of 6.8 billion rupees for the current year to 450 billion rupees (exceeding what was procured during the Dar/Ismail era). In this context, it is relevant to note that while on the IMF programme the PML-N government did not procure loans from commercial banks as it had access to concessional funding and only when the Extended Fund Facility was completed (September 2016) and concessional funding dried up (as the comfort level of donors that the administration would remain on a reform path dramatically declined) did the administration begin to borrow from commercial banks – 211 billion rupees in 2016-17, and 406.2 billion rupees in 2017-18.
To determine why the Khan administration is relying so heavily on commercial borrowing while on an IMF programme, a condition that is certainly not the norm but which reflects Hafeez Sheikh’s acceptance, reflected in the IMF press release: “Financing support from Pakistan’s international partners will be critical to support the authorities’ adjustment efforts and ensure that the medium-term program objectives can be achieved…..This agreement is subject to IMF management approval and to approval by the Executive Board, subject to the timely implementation of prior actions and confirmation of international partners’ financial commitments.” Disturbingly this explains why there is an additional component in the table for external resources titled budgetary support from friendly countries claiming that 750 billion rupees procured from ‘friendly countries’ for one year has been rolled over. So far there is no official confirmation that the amount has been rolled over by Saudi Arabia, UAE or indeed China.
To conclude, the budget 2019-20 is vintage Hafeez Sheikh: presents data that is not reconciled by understating expenditure while overstating revenue.
The budget envisages current expenditure of 7.288 trillion rupees compared to the revised estimates of 5.589 trillion rupees for the current year – a rise of 30 percent. The Khan administration has been consistently maintaining that it would reduce current expenditure after the chief of army staff volunteered to take 1.15 trillion rupees for next year, the same amount as during the current year, which would include no pay raise for officers though the jawans would be eligible for a pay raise; the civilian government officials also reportedly volunteered no pay raise next year though junior officers would receive a pay raise and the cabinet members, with not a one reliant on salary for meeting living expenses, taking a voluntary cut of 10 percent in their ministerial salaries. So what increased in current expenditure that accounted for the 30 percent raise? Mark up would rise by 45 percent – from the revised estimates of 1.987 trillion rupees to 2.891 trillion rupees and pensions (military and civilian) from 342 billion rupees in the revised estimates to 421 billion rupees next year.
Domestic financing is budgeted at 1 trillion rupees with zero borrowing from SBP, an IMF condition. Most disturbingly, the projected budget deficit, one of the items that would no doubt be looked at keenly by the IMF and, without doubt negotiated downwards as no Fund package can support an unsustainable deficit of 7.1 percent for the first year of the programme (especially as the stated deficit for the outgoing year is 7.2 percent), is given as negative 7.2 percent on page 49 of the Budget in Brief and the facing page 48 claims a deficit of negative 7.1 percent.
And there is no mention in any of the budget documents including the finance bill as to what dollar-rupee parity was used to determine the mark up rate on foreign loans as well as in calculating revenue from customs duties.
(This news/article originally appeared in Business Recorder on June 17th, 2019)