A Business Recorder exclusive has revealed that the cabinet has agreed to rescind SRO 1125 thereby abolishing the zero-rated facility to five major export sectors - textiles, leather, carpets, surgical and sports goods. This facility was designed with a view to arresting the slide of exports, first by the Nawaz Sharif administration, followed by the Shahid Khaqan Abbasi administration which extended additional incentives to the export sector and continued by the Khan administration.
Exports began declining in 2016 due to Ishaq Dar's flawed policy to keep the rupee overvalued through market interventions, supported by massive foreign borrowing and withholding of sales tax refunds of exporters to artificially show higher revenue collections; at the same time, imports became more attractive leading to a record high current account deficit by 2018. However, while borrowing was relatively easy for Dar when the country was on an IMF programme yet once the programme was completed by October 2016, access to foreign loans became more difficult and more expensive and foreign exchange reserves began to fall to critical levels.
However, exports did not respond positively to these expensive measures and as per the State Bank of Pakistan website in April 2018 cumulative exports were 20.489 billion dollars while in April 2019 the amount was 20.090. Imports however declined from 46.3 billion dollars in April 2018 to 44 billion dollars in April 2019 reducing the current account deficit.
The Abbasi administration depreciated the rupee by 5 percent in December 2017, at the request of the first post-programme International Monetary Fund (IMF) mission, and then again in April 2018 by 4.5 percent as the Fund uploaded the entire report of that mission on its website in which it stated that: "while the depreciation allowed in December was a step in the right direction further steps to phase out foreign exchange interventions and allowing greater exchange rate flexibility on a more permanent basis will be critical to contain the external pressures and improve competitiveness." That permanent basis has now been agreed by Pakistan's two major players in the economic arena - Special Advisor to the Prime Minister on Finance Hafeez Sheikh and Governor State Bank of Pakistan Syed Reza Baqir as 'prior' programme conditions. Additionally, the confirmation of reaching a staff-level agreement noted in the Fund press release stipulates that priority areas of reform include 'facilitating trade' which economists define as using the exchange rate alone, which is to be market-based, to facilitate trade. In other words, once again, the standard rate of GST would apply to the five major export items or 18 percent as the Federal Board of Revenue's (FBR's) proposal, which has not yet been approved by the cabinet, is to raise GST across the board by one percent projected to generate an additional 40 to 50 billion rupees.
FBR has also proposed to eliminate exemptions by around 300 to 350 billion rupees (the current amount for this purpose is 680 billion rupees), increase and expand the federal excise duty net, revise income tax slabs with a potential raise in revenue of 90 to 120 billion rupees, abolish presumptive tax regime imports and exports and mobilize an additional 250 billion rupees through administrative measures. However, all these measures put together are going to generate a maximum of one trillion rupees while Dr Hafeez Sheikh has given the target of nearly 1.5 trillion rupees.
This presents a scenario of one of two situations both unsavoury for the public. First, if Dr Sheikh takes his revenue target and allocates expenditure against it then there would be a shortfall of half a trillion rupees at least which would imply either a mini-budget later in the year and/or a cut in expenditure. Precisely which expenditure will be cut is debatable given that the Fund has specified that development spending and poverty alleviation/social sector funding is not to be curtailed; however the finance ministry may not be empowered to curtail either a reduction in defence or running of civilian government. Second, it may then insist on FBR to raise taxes further to meet the budgeted revenue target which again would hit the general public's income.
To conclude, in either scenario, the price for setting an unrealistic revenue target to fund whatever expenditure the advisor on finance can manage to contain by convincing the civilian and military leaderships, would have to be borne by the public.