True to its word to the International Monetary Fund, the PTI’s new economic team has rolled out an apparently aggressive revenue plan for the next fiscal year beginning July 1.

The budget 2019-20 has committed to deliver 0.6 per cent of primary balance, notwithstanding the highest ever fiscal deficit target of 7.2pc of GDP. The central bank has hiked its policy rate to the highest level perhaps in recent history and the exchange rate continues to make adjustments towards the ‘desirable’ zone.

Moving quickly, the National Electric Power Regulatory Authority (Nepra) has approved uniform increase of Rs1.50 per unit (almost 15pc) in consumer tariff for power distribution companies from July 1 with minor variations.

The foremost challenge for the PTI government is to get the Finance Bill 2019-20 passed from the parliament where it has already set a difficult stage with unfriendly engagements with the opposition despite a tight numbering game

The Oil and Gas Regulatory Authority (Ogra) has already determined a 47pc increase in prescribed prices of natural gas. This too has to be actualised for consumers from July 1.

The series of ‘prior actions’ are thus mostly complete, even if some of them are still on paper and will have to go through the test of time. There are chances of half-yearly, instead of quarterly, IMF reviews to enable greater operational flexibility.

According to Dr Hafeez Shaikh, the PM’s adviser on finance, the IMF staff would, over the next few weeks, defend its agreement with Pakistan for the approval of the $6 billion package by its management and executive board as is routine.

The challenges at home are still many. The foremost is to get the Finance Bill 2019-20 passed from the parliament within the remaining 11 working days of the current fiscal year where the ruling party has already set a difficult stage with unfriendly engagements with the opposition despite a tight numbering game. There could be serious legal, procedural and accounting question marks unless dealt with forbearance, patience and political foresight.

It is also crucial that the power sector companies in particular and public sector entities in general are able to meet the IMF targets. The power sector circular debt could be eliminated in the short-term (by December 2020) through the ongoing campaign against past recoveries but this would be sustainable only when their system losses at 18-19pc at present are reduced to half.

But more importantly, full-fledged ownership of the budgetary measures announced would be most crucial for smooth implementation in line with the performance criteria agreed upon with the IMF.

Dr Shaikh has failed previous IMF examination not because of the shortcomings of the programme, or his economic plans, or difficult economic conditions, but chiefly because of lack of support from the party of Asif Ali Zardari and adverse political environment.

The budget promised a revenue addition of over Rs1.4 trillion (34pc) over the next year from an estimated base of Rs4.15tr during the current fiscal year. That appeared to be a steep adjustment, compelling many commentators to find it unrealistic and ambitious without taking into account some of the shortcomings of the current fiscal year.

For example, the government suffered a loss of Rs400-500bn on account of initial populism of the PTI administration and court cases — remember reduced sales tax on petroleum products and the suspension of taxes on telecom services to name a few. Both now stand revived which means these were lost this year but are available in the base for next year without any policy action.

Then there are the finance ministry estimates of up to 13pc rate of inflation for next year and about 2.4pc economic growth rate. This means there would be an automatic revenue growth of more than Rs640bn. That leaves a fresh revenue requirement of no more than Rs400-500bn.

The adjustments on account of income tax are expected to generate almost Rs250bn. It is, however, another matter that the worst victims of adjustments in sales tax and income tax would be the salaried and non-salaried individuals faced with double jeopardy of declining incomes, rising inflation and higher tax incidence.

On top of that, removal of the zero-rated regime to export sectors and normal sales tax regime on some major areas like sugar, cement and edible oil and ghee, an additional recovery of Rs500-560bn should not be a big deal.

That also partially explains the increase in sales tax target to Rs2.1tr for next year against revised current year estimate of Rs1.5tr, up 42pc (about Rs620bn). Total income tax collection is also targeted to increase to Rs2.07tr against Rs1.65tr revised estimated this year, up almost 26pc. In fact, this also indicate that the government still has the room to make a deal with export sector with a lower GST rate to begin with, if it wanted to avoid a sudden shock.

The downside, however, is that indirect taxes would again grow by almost 40pc to Rs3.5tr compared to significantly lower growth of 25pc in direct taxes to Rs2.08tr. “Other taxes” too are targeted to increase by 40pc to Rs895bn next year against Rs638bn during current year.

Strangely though, the government has estimated the fiscal deficit for next year at Rs3.151tr or 7.2pc of GDP that remains unchanged at current year’s estimate of 7.2pc of GDP. That leaves an uncertainty over the fiscal deficit target to begin with because it takes into account a provincial surplus of Rs423bn or almost 1pc of GDP.

This is highly risky given past record and depends on success of the FBR to deliver Rs5.555tr target. Also, the provinces have seldom met cash surplus targets, even during current year the centre hardly expects Rs59bn from provinces against budget target of Rs286bn.

Almost Rs2.892tr is estimated only for interest payments, accounting for almost 6.6pc of GDP. That explains the reason behind the shift from fiscal deficit in IMF programme to primary deficit or 0.6pc, precisely Rs260bn difference between fiscal deficit and interest payments. Measured by excluding interest payments, the primary deficit is targeted to reduce from current year’s 2pc (Rs770bn) of GDP to 0.6pc next year and turn positive next so that debt-to-GDP ratio is scaled down to 75.2pc of GDP in 2020-21 from 77.7pc during current and next year.

The financing of deficit would mostly come from external resources, Rs3.20tr to be precise including IMF loan of Rs358bn ($2.4bn) during 2019-20. About Rs750bn target is set for budgetary support from friendly countries which means the loans from Saudi Arabia and UAE would be rolled over for another year as desired by the IMF.

Published in Dawn, The Business and Finance Weekly, June 17th, 2019