Clearly, there is need for demonstration of much better management during the ongoing fiscal year. The target budget deficit has been fixed at a high level of 7.1 percent of the GDP. Therefore, there is not much scope for exceeding this level of deficit. Also, Pakistan is now operating under an IMF Fund facility and there will be strong pressure to demonstrate an adequate level of financial discipline.
There are two performance criteria in the IMF related to the management of public finances. The first is that the primary deficit must be brought down to only 0.6 percent of the GDP in 2019-20. It reached the peak level of 3.5 percent of the GDP in 2018-19. Therefore, a very sizeable reduction has to be achieved of 2.9 percent of the GDP. Such a large containment of the primary deficit has never been attempted before including in the two previous IMF programs in a given financial year.
The second performance criteria require the Government to completely refrain from borrowing from the SBP in 2019-20. This is also in sharp contrast to what happened last year, when there was record level of borrowing from the central bank of Rs 3,150 billion. Emphasis will have to be placed, therefore, on substantially larger external financing and borrowing from commercial banks and non-bank sources. An appropriate debt management strategy ought to have been developed.
A targeted level of FBR revenues has not been included in the performance criteria. Instead, it has been included as an indicative target. However, achievement of the level of revenue of Rs 5,503 billion has to be the key element of the strategy to bring down the primary deficit to only 0.6 percent of the GDP in 2019-20.
What are the major risk factors in achieving the budgetary targets? Already, the need for raising FBR revenues drastically has been emphasized above. Next, given the dismal performance of non-tax revenues in 2018-19 when they plummeted by over 42 percent, they will need tobe raised by almost 146 percent in 2019-20. Bulk of the increase is expected from a quantum jump in the receipt of profits from the State Bank of Pakistan of almost Rs 400 billion.
Risk factors on the expenditure side include, first, the level of debt servicing. Not only will the interest rate policy have to be carefully managed but various avenues will have to be explored for expanding the domestic debt market.
Second, uncertainty with regard to the level of defence spending has increased. There is need to recognize the extraordinary gesture by our Armed Forces of not asking for any nominal increase in size of their budget in 2019-20. Consequently, the defence budget has remained unchanged at Rs 1,152 billion. However, the emerging situation in Kashmir and the growing tension on the Line of Control may require additional budgetary provisions.
The time has come for development of a well-defined contingency plan for management of the budgetary process in 2019-20, especially if the fiscal targets are not revised in light of the adverse outcome in 2018-19.
Some of the key elements of such a plan could include, first, setting a more feasible target for FBR revenues. Given the larger shortfall last year, the required growth rate has jumped up further to 44 percent. Already, in the first ten months the growth rate has remained restricted to 17 percent and there has already been a shortfall of Rs 67 billion. A realistic target for FBR, given the persistent slowdown and strong import compression, now seems to be closer to Rs 4,750. This would still be ambitious and imply a growth rate of 24 percent, which has not been achieved before. The shortfall in relation to the budget estimate is then approximately Rs 750 billion.
Similarly, achieving the growth rate of 146 percent in 2019-20 in non-tax revenues may well be beyond the realm of possibilities. It will hinge on SBP generating a record level of profit of Rs 408 billion. If the rupee continues to depreciate then the rupee value of SBP liabilities will go up and reduce profits. Also, no additional borrowing is envisaged from the SBP. This will limit the growth in interest income. The contingency plan must, therefore, include efforts at generating receipts through sale of assets. This must involve sale of shares of profitable state-owned enterprises.
A scaling down of the FBR revenue target must be balanced by a corresponding reduction in non-debt servicing-related expenditure of Rs 750 billion if the primary deficit is to be attained. The scope for additional taxation is clearly very limited given the heavy additional taxation already in the budget of 2019-20.
The potential areas for expenditure are manifold. These include, first, emphasis on economy in expenditure such that the contingency provision of Rs 112 billion is not required to be availed. Of course, this may need to be allocated to the Armed Forces to tackle any warlike threat. These would represent exceptional circumstances and the budget deficit would need to be adjusted accordingly.
There is a somewhat non-transparent provision of Rs 308 billion to meet so-called 'contingent liabilities' in grants. The growth provided for under this head of expenditure is almost 50 percent. Presumably, this is larger to sustain the debt servicing capacity of guaranteed debt of state-owned enterprises. However, the IMF program requires no further flotation of guaranteed debt. This should restrict the growth in contingent liabilities in 2019-20.
The other expenditure head where a cutback may become necessary is on social protection and the BISP. The joint allocation has been increased by 230 percent to Rs 370 billion in 2019-20. This increase may, in fact, exceed the ability of various institutions to expand the coverage and target effectively the additional funds. Therefore, a cutback of Rs 100 billion would be possible even in the presence of substantially expanded programs.
There is also the question of a special grant of Rs 56 billion to Khyber-Pakhtunkhwa presumably for the merged districts. With a high growth rate in the divisible pool of revenues and accordingly in transfers it should be possible for the Provincial government to bear the burden of additional costs.
Finally, there is a sizeable increase in the Federal PSDP of 25 percent in 2019-20. If the other options for expenditure cutting are not adequate then the growth may be limited to 13 percent. This is the inflation rate projection for 2019-20. As such, a reduction of approximately Rs 70 billion would still keep the size of the PSDP constant in real terms.
The year, 2019-20, promises to be especially challenging for the Ministry of Finance. Not only will it have to manage better Federal finances but it will also have to coordinate with the Provincial Finance Departments to ensure that they generate a combined cash surplus of almost 1 percent of the GDP. We wish the Ministry of Finance success in its efforts to improve the budgetary position of the country.
(The writer is Professor Emeritus and former Federal Minister)