First, we may measure it with respect to what the FBR says its collection target was, although setting a target which is only 5.2% of its annual target is quite unrealistic. It is claimed that the target was Rs 291 billion. Relative to this, 96% of the target was achieved. Second, we should see how far it compares with respect to the quarterly target. The quarterly target was Rs 1067 billion. This represents 32% increase over the first quarter of 2017-18. There are two possibilities of comparison. We can ask for 32% growth every month or divide the quarterly target equally in three months. In the former case, the target would have been Rs 333 billion and in the latter Rs 356 billion. The July performance, therefore was only 83% of the former target and 78% of the latter. Finally, we look at it in the bigger picture. The annual target of Rs 5550 billion represents a 45% increase over the last year's collections of Rs 3820 billion. Clearly, in this larger context, the growth of 10.8%, irrespective of any target for the month of July, is not very encouraging. It casts a specter of major failure in revenue effort relative to full year target.
What is more of a concern is that there are still unresolved issues between the FBR and taxpayers as is evident from numerous threats and calls for strike from business/traders association. We have been suggesting to authorities that they keep the objective of documentation different from the goal of revenue collection. With so much friction, the economy is not working at its full potential and could not generate taxes at the desired level.
The fiscal adjustment under the IMF program has two important aspects. One, it targets the reduction in the primary deficit as opposed to overall fiscal deficit. Two, even though it is improved equally from increased revenues and decreased non-interest expenditures, almost exclusive reliance has been placed on increased taxes. What has transpired from the program document (staff report) is that the projection of primary deficit for 2018-19 was 1.8% which was to be brought down to 0.6 in the first year of the program. Yet the tax effort is stated to be 1.7% (or 1.6% as shown in Table at page-32, which comes to Rs 748 billion. If the primary deficit is to fall by 1.2% of GDP and tax effort is 1.7%, this means that 0.5% has been spared to cater for additional non-interest expenditures. This is a novel of fiscal adjustment: when you raise taxes to reduce the deficit, a portion is reserved to increase expenditures. This is unprecedented. It would have been more equitable not to have raised taxes more than what was needed to bring down primary deficit to 0.6%. [Part of this has been neutralized because of lower tax collections during 2018-19 and subsequent increase in primary deficit]
The inflation data for July 2019 is also out. The headline inflation was registered at 10.39%, which was previously observed in November 2013 at 10.9%. Much of this has come from the housing side that included gas, electricity and rents, all having adjusted in July. Does that indicate that the high inflation forecast of 11-13% in budget documents and 13% in staff report are on their way to realize? It is too early to conclude. We need to look at the average inflation, which at present is the same since there is only a single observation for the month of July. However, we can look at the moving average inflation for the period Aug-18 and Jul-19. This has increased from 7.3% to 7.4%, which clearly shows that there is nothing alarming on the inflation front.
With that, it needs to be underlined that the real interest rate, measured against the average inflation, remains exceptionally high at around 6%. Such a rate is consistent with a state where a policy of economic contraction is pursued. What good are such high rates in mobilizing savings when there are no avenues to invest, as investors would find it uneconomical to invest in new venture on such a high cost of borrowing.
An auction for treasury bills (TBs) was held on 31-7-2019. The target was Rs 1.5 trillion comprising Rs 603 billion for maturity and Rs 897 billion as additional borrowing needs. The auction received total bids for Rs 887 billion at a return of 13.75 for three months, 13.95% for six months and 14.16% for twelve months. However, 90% of the bids were for three months. These results have some challenges for the debt management policy.
First, the excessive borrowing in three months continues unabated despite the need to correct it under the program conditions. Second, the total bids were significantly short (60% of the target) of the target despite having liberal injection through the OMO, which stood at Rs 1.8 trillion as on 26-7-2019. Third, the amount not subscribed ends-up as SBP borrowing, which is supposed to be barred under the program. Finally, the need for government borrowings is so phenomenal that any suggestions that it may be replaced by commercial banks in any meaningful way is unrealistic. Much of the shift in government borrowing toward commercial banks, seen in recent weeks, is the result of SBP lending to banks for re-lending to the government. This means that the policy of monetary accommodation continues unabated. Only after the foreign borrowings come into play, this situation would remain in place.
With market for loanable funds in turmoil, the stock market also shows signs of deepening strains. Since the Fund program was approved, the market has lost nearly 9% of its index value. Except for a few positive days, the market has been continuously losing value. Last year foreign investors divested $700 million from the market while there is hardly any hope for new investors.
The above round-up is not very encouraging. The slow pace of economic activities is visible everywhere. There is hardly a voice that is building hope, promising a better tomorrow. The need for it is acutely felt.
(The writer is former finance secretary) [email protected]