Budget projections for FY25


There is overwhelming evidence that approval of the budget for next fiscal year, reportedly to be presented to parliament on 7 June, will be a “prior” condition for the twenty fourth International Monetary Fund (IMF) programme currently under negotiation.

The staff-level agreement on the second and final Stand-By Arrangement (SBA) was reached on 20 March 2024, the staff-level agreement (SLA) was completed on 8 April, the Board approval – a prerequisite for the release of the tranche – was issued on 29 April, while it was uploaded on the Fund website on 11 May. The nearly seven-week delay after the staff-level agreement was reached till the report was uploaded on the website was, in all probability, contingent on the implementation of prior conditions. So what were these prior conditions?

There were no prior monetary policy conditions for the State Bank of Pakistan to implement as has been the norm with the exception of the period when Ishaq Dar had held the finance portfolio. The rupee-dollar parity has been relatively stable in recent months and the Fund’s final report commends the “authorities’ resolve in eliminating Multiple Currency Practices (a policy associated only with the disastrous Dar era) but warns that “efforts should continue to achieve greater foreign exchange market depth, while proactively rebuilding reserves via interbank purchases as conditions permit.” And the discount rate remains unchanged at 22 percent and this has to be sourced to the IMF given its widening disparity with inflation data – in April the Consumer Price Index was 17.3 percent and core inflation was at 13.1 percent.

Four post-SLA executive decisions, those taken by the Cabinet, do indicate the implementation of prior conditions. First, the National Assembly passed a Tax law (Amendment) Bill on 29 April which as per the statement of objects and reasons was aimed at “giving legislative effect to the taxation proposals of the federal government to liquidate a significant number of appeals before Commissioner Inland Revenue (Appeals) and Appellate Tribunals as Appellate Tribunal Inland Revenue (ATIR) is the last fact-finding authority in the appellate hierarchy provided in fiscal statutes. Over the years, and for various reasons, including arbitrary constitution of benches, inadequate number of benches, delay in fixation of cases and disposal of appeals, a substantial amount of revenue to the tune of Rs 2 trillion, is held up in litigation before the ATIR.”

Azam Nazeer Tarar, Federal Minister for Law and Justice, argued that prior to the passage of the bill there was no fixed time for disposal of cases and that “through amendments in the law liabilities up to 20 million rupees will be appealed at the commissioner level and cases above 20 million rupees can be appealed before Inland revenue tribunals and the appeals of both these streams will go to the high courts in the form of a reference.” He added that “with this amendment there will be no recovery until the passage of 30 days.”

Previously to the passage of the law all cases, irrespective of the amount in question, were first sent to the Commissioner Inland Revenue (appeals) and only in the event of the litigant challenging his decision would the matter be taken up by the AITR. Whatever AITR’s final decision the matter could then be challenged in a high court. And that is precisely where pendency remains high.

Business Recorder consulted with various legal experts who unequivocally stated that the delays in resolution of cases are in the high court and hence this legislation is unlikely to reduce pendency or generate the 2 trillion rupees held up in litigation. The way out, some suggested, maybe to allow the appeal to be heard directly by the apex court though it is unclear by how long, if at all, the pendency of such cases would be reduced.

On 22 March the FBR issued a Statutory Regulatory Order (SRO) making it mandatory for 14 businesses to integrate with points of sale system in real time. The list included courier services/cargo, inter-city travel by road, hotels/motels etc. without air-conditioning, beauty parlours, clinics, all medical service providers including dentists, pathological laboratories, private hospitals, health care/gyms, accountants, retailers, foreign exchange companies and private educational institutions. So far there has been no compliance, perhaps this measure will be proactively implemented from next fiscal year, and time will tell if this will be a successful initiative.

On 30 March FBR issued another SRO notifying a special procedure for small traders and shopkeepers titled Tajir Dost (special) procedure with 30 April as the deadline for registration. To-date only 14,000 out of 3.2 million (0.4 percent of the total) have registered and currently negotiations are underway with both sides expressing optimism though past precedence shows that the outcome would be a severely watered down version of the scheme.

On 18 April FBR issued yet another SRO, which raised the price of compressed natural gas from 140 per kg to 200 per kg, which would enable the Board to collect higher revenue from CNG stations though the applicable sales tax rate would remain the same, 18 percent. This is an indirect tax that would be passed onto the lower to middle income earners, an inflationary policy.

The expenditure side of the budget, as per the IMF final document, is projected to rise by 16 percent (from the projected expenditure for the current year at 21,283 billion rupees to 24,710 billion rupees next year) with the federal current expenditure projected to rise by 16 percent (from 14,414 billion rupees to 16,712 billion rupees) and provincial current expenditure to rise from 4,716 billion rupees in the current year to 5,325 billion rupees next year – a rise of 13 percent. Development expenditure will rise from 2,064 billion rupees (with federal component 782 billion rupees) to 2,590 billion rupees next year – an impressive rise in percentage terms of 25.4 percent – however the low base accounts for this rise.

The foregoing reflects three disturbing policies likely to continue in the 2024-25 budget: (i) the government’s intent not to compel the influential recipients of our tax rupees to voluntarily sacrifice in terms of no pay rise and curtailment of all procurement for a period of at least two years; (ii) IMF’s fundamental design flaw is to focus on overall revenue collections largely generated from indirect taxes (70 to 75 percent of total tax collections today are from indirect taxes) whose incidence on the poor is greater than on the rich, a major factor for the 40 percent poverty levels in this country. A better option would be to widen the tax net through measures that are not likely to be challenged in a court of law, and not violative of the constitution (inclusive of implement a policy that envisions weighted average cost of gas, a rise in the federal share in the National Finance Commission award and levying income tax on farmers to be collected by FBR); and (iii) an inordinate focus on primary surplus defined as expenditure excluding interest on borrowings – a key component of our current expenditure which incidentally is a contributing factor to the unsustainable budget deficit since 2019 (above 7 percent of GDP), a highly inflationary policy. One can only hope that the Fund focuses on both the primary as well as the fiscal deficit.

To conclude, there is overwhelming evidence that the finance ministry is simply plugging in revenue and expenditure figures taken from the SBA final report and the economic team’s maneuverability is limited to overestimating next year’s Gross Domestic Product to justify higher outlay for a specific sector/influencer however with the successor programme under negotiations this is going to be possible only after Fund staff approval.

Copyright Business Recorder, 2024


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