The budget for the next fiscal year to be announced on Tuesday (tomorrow) must set the direction and pace of fiscal and structural reforms and adjustments the Imran Khan government is expected to undertake over the next three years under the $6 billion loan deal with the International Monetary Fund.

The statement put out by the IMF following the staff level agreement on the Extended Fund Facility (EFF) programme with Islamabad last month had also termed the forthcoming budget as a ‘first critical step’ in the Pakistani authorities’ fiscal strategy.

The 39-month facility — which is projected to help Islamabad reduce its bulging debt, and stabilise the economy before putting it back on the road to ‘sustainable growth’, has been packaged with extensive, wide-ranging reforms in three areas: monetary, fiscal and structural.

Most of these reforms will have to be implemented in the next budget as prior actions required for the IMF executive board approval and release of the first loan tranche. Others like full cost recovery from the electricity and gas consumers will be executed outside the budget later but before the IMF board’s approval of the loan.

The government has largely executed monetary reforms by moving towards a market-determined exchange rate and heftily increasing interest rates to fight the projected spike in inflation in the coming months as a result of the sweeping fiscal adjustments.

Now is the time for the wealthier classes to take the hit of these adjustments with abolition of tax exemptions. But will they?

It is bound to use the next budget for reducing primary deficit to 0.6per cent of GDP from 0.9pc through tax policy revenue mobilisation measures to eliminate exemptions, curtailment of special treatments and improvement in tax administration.

Additionally, the budget will cut government spending without affecting development investment besides enhancing funding for the Benazir Income Support Programme (BISP) and to protect the most vulnerable segments of society through targeted subsidies.

Indeed, the most difficult part of the IMF stabilisation programme will be the mobilisation of additional tax revenues of Rs1.45 trillion to Rs5.55tr over the next year; a huge jump of over 35pc from the present fiscal’s projected collection of Rs4.1tr.

The pain of tax adjustments — and full cost recovery of energy from consumers — will be broad-based and felt by every segment of population.

The middle-class households have already seen their stagnant incomes shrink massively over the last 10 months as a consequence of the increased energy prices and impact of currency devaluation on their cost of living and job losses.

Cost of living will rise further as the government increases the electricity and gas prices going forward in the first quarter of the new fiscal year to bring the power sector debt down from Rs450bn a year to zero by December 2020.

Now is the time for the wealthier classes to take the hit of these adjustments with abolition of tax exemptions and curtailment of special treatments. But will they?

The government claims notwithstanding, its resolve to tax the wealthy so far appears weaker than what is required to undertake the effort of massive revenue mobilisation.

Many expect the budget to also shed light on the government’s plan on privatisation of the state-owned enterprises (SOE) that are eating into the meagre public financial resource and are a major burden on the budget.

Finance Adviser Dr Abdul Hafeez Shaikh has already indicated a shift in the professed policy pursued by former finance minister Asad Umar of trying to restructure the SOEs and make them profitable by freeing them from political and bureaucratic control.

The budget will be the best place to announce the new policy and set the pace of privatisation of the loss-making public sector businesses as part of the structural reforms.

GROWTH: According to some published reports, the National Economic Council (NEC) has approved a national public development stimulus of Rs1.8 trillion to boost faltering economic growth to 4pc GDP next year. This figure is based on the sectoral growth of 3.5pc in agriculture, 2.2pc in industry and 4.8pc in services sector.

The targeted GDP growth rate is markedly higher than the 2.8pc projected by the IMF for the next year. The 12th Five-Year Plan (2018-23) forecasts the growth rate to spike to 6.5pc in its terminal year, relying mainly on the acceleration in investment on the back of industrial cooperation with China around the China-Pakistan Economic Corridor (CPEC) initiative.

However, the growth targets for the next four years appear as ambitious and unrealistic as the revenue mobilisation target for the coming fiscal year.

The IMF stabilisation programme will squeeze the fiscal space for planned expansion of manufacturing for import substitution and export enhancement. The export industry, especially the textile exporters who contribute over 58pc of the country’s total export revenues, have already warned of putting on hold their investment plans for an indefinite period if the sales tax exemption under the zero-rate regime is withdrawn.

They fear the move could lead to a liquidity crunch, especially for the small to medium sized exporters, as payments of their tax and other refunds are delayed for more than one year.

Hafeez claimed at a presser last month that the budget 2019-20 would be based on government’s philosophy and determination to put Pakistan back on the road to permanent, sustainable prosperity and development.

“The next one year will be a year of stabilisation aimed at putting the economy on sustainable path of development and saving it from dangers… the ongoing painful phase of reforms will last for two years and recovery will begin in the third year,” he had stated, adding the government would be moving towards higher growth after having consolidated the gains of economic stabilisation.

But then wishes are not horses, are they?

Published in Dawn, The Business and Finance Weekly, June 10th, 2019