Pakistan’s Tehreek-e-Insaf (PTI) government is planning to present another mini-budget next month to counteract the widening fiscal deficit.
This will be the second mini-budget that the PTI has presented in the four months since winning a majority in the general election this July.
Immediately after taking charge in September, the government tabled revised budget estimates in the national assembly and claimed that the fiscal crisis was over.
Through these measures, the government cut spending on development projects to free up funds for defense and debt-service liabilities.
Economic analysts say Prime Minister Imran Khan’s government does not have a long-term economic strategy and is merely taking temporary steps to counteract growing economic problems.
A cash injection of $3 billion from Saudi Arabia has done little to halt the deterioration of foreign exchange reserves, which are under constant pressure from external accounts. The State Bank of Pakistan (SBP) has $8.1 billion in reserves as of mid-December compared with $14.1 billion in December last year, despite already receiving $2 billion of the Saudi Arabia loan.
The decrease was attributed to foreign debt servicing and other ‘external commitments.’
During Thursday’s briefing to the Senate Standing Committee on Finance and Revenue on the state of negotiations with the International Monetary Fund (IMF), Finance Minister Asad Umer said the government was seriously considering a proposal to increase taxes and readjust tariffs.
He also disclosed that the $3 billion Saudi loan was arranged at a 3.18% interest rate. He said Pakistan would start receiving $274 million worth of oil from Saudi Arabia every month from January next year on a deferred payment arrangement.
Without disclosing details of the new tax measures, he said that the bill will be presented in parliament in early January.
Nauman Wazir, a PTI senator and CEO of a top Pakistan steel company, told the Asia Times: “The mini-budget would mostly contain tax adjustments with some items getting higher tax incident and some lower. The export-oriented goods and services, for instance, would be considered for a lower slab to make the export industry competitive in the global market but the luxury items would be slapped with higher taxes to discourage import.”
He said the government would be discouraging debt-based economic growth and focus on broadening the tax base in order to kick-start a chain of economic activities in the country.
The tough economic decisions have affected the government’s popularity, he said, but they will continue to take bold measures to bolster the country.
“The economic growth rate might come down to 4% from the last year’s 5.8% but the struggle to revamp the economy will continue because it is the top decision that we have to take,” Wazir added.
Despite Wazir’s optimism, sources in the ministry of finance told Asia Times the government started feeling the heat after IMF bailout negotiations hit a snag and China refused to budge on demands for cash loans to rebuild the country’s foreign exchange reserves.
The ministry of finance sources claimed that tax collection during the first five months of the fiscal year showed a shortfall of over Rs 124 billion (US$886 million) which might increase to over Rs 250 billion (US$1.8 billion) by the end of the fiscal year in June 2019.
The Federal Board of Revenue (FBR), the sources claimed, had suggested deducting taxes on the top-up of prepaid cards by mobile phone service providers. The revenue could reach Rs 80 billion (US$572 million) annually.
In another proposal, the FBR urged the federal government to apply a set sales tax on petroleum products starting January instead of charging sales tax on the price, which fluctuates and throws off revenue projections.
“Their tax recovery has gone stagnant and they [PTI] now take steps that could generate revenue to make good the shortfall,” Rana Muhammad Afzal Khan, a senior Pakistan Muslim League-Nawaz (PML-N) leader and former finance minister, said.
He claimed that the government was confronted with chronic economic problems with $2 to $3 billion in monthly trade deficit and a $9.3 billion annual external debt repayment.
“There has been gloom in the market and everything seems at a standstill. The cost of doing business has increased and investors are in a state of confusion [on] how to do away with a sudden escalation in the cost of capital goods and how to ward off inflationary pressure to do business in the country,” Khan said.
He added that the coming days were crucial for the government, as political instability in the country would increase if Pakistan People’s Party (PPP) and PML-N leaders were arrested.
“The PPP and PML (N) have already announced agitation in case their leaders are apprehended in phony corruption charges,” he warned. “The PTI does not think that public protest and agitation can affect the growth of the economy.”
On the other hand, Wazir said: “We held a sit-in in Islamabad for well over 126 days but the economy did not suffer and business goes on as usual. The opposition can protest if they wish, it is their democratic right, but we will move forward on our agenda.”