The assembly floor may heat up again come October, as senior economist Hafiz Pasha expects a mini budget to be announced in October when VAT (or call it 'reformed GST' if you are Hafeez Shaikh) is due to be unveiled. Ironically, much of the post budget debates were on the mere modalities of CGT imposition on securities' transactions and few other minor items.
Whereas, the government is eyeing to collect just Rs5 billion from the imposition of GST and experts have doubts on the increase in documentation by passing this legislation owing to administrative weaknesses of the tax collector. The government is likely to miss its deficit target by, at least, 1.5 percent (Rs225 bn) for the upcoming year (as discussed in this column last week). The question arises is that what are the avenues, on margin, to finance it.
In all likelihood, the government will knock the familiar doors of the State Bank to finance the deficit, given low domestic savings and given that foreign budgetary support funding is unlikely to materialise.
Mind you, government slippage of State Bank borrowing for June end IMF target already stands at Rs246 billion (as of June 11). Hence, the fund might pressurise fiscal managers to find alternate avenues to plug in expenditure over and above the budgeted amount, especially Rs100 billion impact of the last moment unaccounted for increase in public sector salaries.
This has to come either by slashing some other expenditure or through higher revenues. The chances of latter are high as there is little room to slash federal PSDP, which is just Rs280 billion.
This means both broadening the base and increasing the rate. Experts acknowledge that this is not going to be as easy as it may sound but the government might not have another option. Nonetheless, what is done is done; centre should seriously work with the federating units to broaden the tax base, especially to include corporate services in sales tax by October.
There is a list of 20-25 services which are out of tax ambit including financial services, business services and the entire corporate sector services. For instance, Pakistan Private security services, according to an estimate, are bigger than police work force and can alone add Rs20 billion in government revenues.
Similarly, automobile authorised dealers, corporate container services (mostly run by multinationals), software service providers (mostly provide services to government sector) and many others shall be brought in sales tax ambit.
According to estimates, these services alone can conservatively add 1.2 percent of GDP (Rs180 bn) in revenues. Dr. Shaikh and his team need to sit with provinces to resolve this issue before the implementation of VAT in October. Moreover, finance experts from the opposition bench need to look beyond their political affiliations and need to sit with the government as one unit to bail the country out of the troubled times it currently faces.
MONEY AGGREGATES:
The government continued to borrow from central bank to fill its ever increasing appetite. In order to comply with IMF's ceiling target, government ought to retire Rs246 billion in next three weeks.
That seems highly unlikely to happen. With budgetary support retirement of Rs14 billion from scheduled bank, the central bank borrowing mitigated and marginal credit raised by commodity operations, net government borrowing stood at mere Rs3 billion for the week ending June 11. Ever since, the receipt of last IMF tranche, net foreign assets continued its smooth downward journey as net retirement reached Rs42 billion for the last five weeks. This trend might continue for the remaining three weeks of this fiscal year.
The dismal performance of private sector, near the end of wheat commodity procurement season and slight increase in currency in circulation resulted in Rs20 billion decline in demand and time deposits of banking sector for the week ending June 11. Hence, the money supply marginally declined by 0.21 percent last week to stand at 9.72 percent for year to date.
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KEY MONETARY AGGREGATES AS ON JUNE 11
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Rs (mn)
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11-Jun 4-Jun Change
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Currency in Circulation 197,381 187,897 9,484
Total Demand & Time Deposits 300,684 320,789 (20,105)
Broad Money (M2) 499,384 509,943 (10,559)
NFA 55,644 67,261 (11,617)
NDA 443,741 442,682 1,059
Net Government Borrowing 505,841 502,940 2,901
Borrowing for budgetary support 441,186 442,397 (1,211)
from SBP 211,355 198,976 12,379
from scheduled banks 229,831 243,421 (13,590)
Commodity operation 65,401 61,250 4,151
Credit to non-govt sector 164,044 168,219 (4,175)
to private sector 75,582 82,871 (7,289)
to PSEs 87,589 84,485 3,104
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Source: SBP
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