Factors impacting FY22 budgets – Opinion

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It is necessary to identify some of the factors likely to have an impact on the main budgetary sizes of the federal and provincial budgets for 2021-2022. These factors are either positive or negative.

Positive factors are identified first. The major boost that will be given to RBF revenues is the prospect of faster growth in 2020-21 in industrial production due to the low ‘base effect’, especially after the Covid-19 attack. Some key industries that contribute sales tax and excise duty revenues are showing exceptional dynamism. These include industries such as sugar, POL products, cement, cigarettes and automobiles. 1% faster growth in industrial production contributes an additional 33 billion rupees to RBF revenues.

While the rise in oil prices can be seen as leading to higher inflation, it unambiguously contributes to the increase in revenue from import duties and sales taxes. The price of oil on the world market rose from $ 35 a barrel on June 20 to over $ 67 a barrel today. The average price in 2020-2021 is expected to be close to $ 57 per barrel. If the price remains at $ 67 per barrel in 2021-2022, additional tax revenue could reach Rs 100 billion.

Overall, if the economy grows faster by 1 percentage point in 2021-2022, given the high elasticity of demand for imports, the level of the aggregate quantity of imports could grow faster by 1, 3%. This will contribute to additional income of over Rs 30 billion.

The main source of withholding tax revenue comes from contracts. Currently, construction activity is booming in the country due to incentives for real estate development and more concessional credit for social housing. A faster 1% growth in construction activity, both direct and indirect, can generate higher tax revenues of Rs 15 billion.

Regarding the negative factors, there is first the drastic reduction in oil levy rates in recent months to neutralize the impact of the rise in international prices of petroleum products. This has important implications for the level of income. Annual tax revenues of up to Rs 500 billion were achievable when the rate was Rs 30 per liter on both HSD oil and motor gasoline. The prices are now 12 rupees and 10 rupees per liter, respectively. If they remain unchanged in 2021-2022, this could lead to a significant loss of income of nearly Rs 315 billion.

The positive impact of a stronger rupee is significant, especially downstream on the inflation rate. However, by reducing the rupee value of imports, this implies a lower tax base for import-related taxes. The probable average value of the rupee is expected to be close to 161 rupees per dollar for the year 2020-2021. It is currently operating at less than Rs 155 per dollar. If this exchange rate remains unchanged in 2021-2022 or if the rupee appreciates a little more, the loss of income could be Rs 70 billion.

There are also factors that play on the expenditure side. Since 2018-19, the military establishment has focused on economics of defense spending to facilitate the management of public finances by the civilian government. Currently, spending on defense services is expected to increase from 2.7% of GDP in 2020-2021 to 2.5% of GDP in 2021-2022. This implies spending savings of over Rs 105 billion.

The sharp drop in the SBP’s key rate after the first Covid-19 attack from 13.25% to 7% is now starting to pay off in terms of lower growth in domestic debt service costs. This is expected to drop from 6.1% of GDP in 2020-2021 to 5.9% of GDP in 2021-2022, again leading to a saving of 105 billion rupees.

The main factor that will contribute to the increase in current spending is the impending increase in wages and pensions that will be announced by the federal government in the budget. Likewise, the two governments of Punjab and Khyber-Pakhtunkhwa have also announced similar awards. The federal government has provided for this purpose in the medium-term budgetary strategy document (SMTBS) an amount of Rs 260 billion for this additional expenditure. If all four provincial governments announce increases in pensions and wages of a similar magnitude, then the combined cost to these governments will approach Rs 300 billion.

A new factor is the need for a larger subsidy to the power sector to also finance the payment of arrears to PPIs. There is no explicit provision for this, it is MTBS. However, the next federal budget could provide up to Rs 200 billion for this purpose.

Overall, it is likely that the budgetary implications of negative factors on both the revenue and expenditure side will significantly exceed the impact of positive factors by nearly Rs 700 billion, or the equivalent of 1.3% of GDP in 2021-2022. . This will imply that the budget deficit in 2021-2022 will persist in a range of 7 to 7.5% of GDP.

The agreement with the IMF was originally aimed at reducing the budget deficit from 7% of GDP in 2020-2021 to 5.5% of GDP in 2021-2022. MTBS has proposed a higher target of 6.0% of GDP for next year. Apparently, the target is now 6.3% of GDP, according to the presentation made recently to the Finance Committee of the National Assembly by the Ministry of Finance.

The higher projected deficit of 6.3% of GDP is still underestimated given the net impact of the negative factors highlighted above. Inevitably, the consequence will be a reduction in development spending, which was to play a key role next year in stimulating the economy. The proposed size of the federal PSDP for 2021-2022 is Rs 900 billion. This figure may need to be reduced by more than 20 percent and will always imply a deficit greater than the target level.

The year 2021-2022 is shaping up to be difficult given the impact of significant negative factors such as reduced oil tax revenues, a large salary and pensions and the need to take steps to reduce the circular debt. of the electricity sector. This will dominate over the contribution of positive factors.

Hopefully the IMF will continue to show understanding in the face of the difficult situation the country faces following the successive COVID-19 attacks. Performance waivers may be required in the sixth and subsequent reviews. The IMF should be reminded that no less than twelve waivers were granted during the mandate of the last IMF program from 2013 to 2016.

(The writer is professor emeritus at the BNU and former federal minister)

Copyright Business Recorder, 2021

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