Amid uncertain circumstances following the resurgence of Covid-19 cases in the third wave of the pandemic, the government expects GDP to grow at a rate of 4.2 per cent in the next fiscal year (2021-22), further up 4.6pc in 2022-23 and 5.1pc in 2023-24.

The medium-term growth trajectory builds on the revised GDP growth estimate of 2.9pc for the current fiscal year, significantly higher than the budget target of 2.1pc and negative 0.4pc last fiscal year.

The Medium-Term Macroeconomic Framework 2023-24 is, however, prepared by the government on the basis of a long wish-list under the revived International Monetary Fund (IMF) programme that the government keeps talking about renegotiating after approving the medium-term budget strategy paper. “Over the medium-term, the government will focus on various policy measures to achieve sustainable inclusive growth,” says the Ministry of Finance. The list of these policy measures — based on deep-impact reforms — is unending.

It includes “broadening of the tax base, expanding the tax net, rationalisation and more precise targeting of subsidies, reduction of the budget deficit, the continuation of a flexible, market-determined exchange rate, structural reforms in public sector enterprises, reforms in the energy sector, strengthening energy transmission and distribution systems, implementation of the national tariff policy, increase in public investments in the management of water, implementation of projects under China-Pakistan Economic Corridor, setting up of special economic zones and special technology zones, implementation of the national agriculture emergency programme and expanding the construction package, especially for low-cost housing”.

The government projects the economy to recover from the pandemic to sustainable and inclusive growth at a time when the severity and duration of the pandemic remain increasingly uncertain

This is in contrast to the recent World Bank analysis that warns that the resurgence of recent infection rates and slow vaccination coupled with the high inflation rate and consolidation policies could impact Pakistan’s nascent and fragile economic recovery and worsen the poverty situation. From a growth forecast of 1.3pc of GDP during the current year, the World Bank expects it to strengthen to an average of 2.7pc in 2022-23 and 3.4pc in 2023-24.

The IMF forecasts are slightly optimistic for the medium term. It projects the growth rate recovering to 4pc of GDP next year (2022) and 5pc by 2026. In the case of inflation, the IMF anticipates the Consumer Price Index to come down from 10.2pc last year to 8pc year-on-year and 10pc on average by 2022. The Fund estimated the current account deficit rising from 1.1pc of GDP in 2020 to 1.5pc in 2021 and then going up to 1.8pc of GDP in 2022 and peak at 2.9pc of GDP by 2026.

Under the medium-term macroeconomic rolling plan, the government is targeting an inflation rate of 8pc for the next year, 6.8pc in 2022-23 and 6.5pc in 2023-24. But the inflation targets should be judged on the basis of the real situation during the current year when the budget estimate of 6.5pc has now been revised to 8.7pc.

The budget deficit is estimated to be contained at 6pc of GDP next fiscal year, 5.2pc in 2022-23 and down further to 4.4pc of GDP in the concluding fiscal year of 2023-24. The 7pc budget target for the current year has already been revised to 7.4pc of GDP while the actual deficit in 2019-20 had crossed 8.1pc of GDP against a target of 7.2pc — which could fairly be attributed to Covid-19 expenses. That means this reduction will require revenue mobilisation with a higher growth trajectory, rationalisation of current expenditures and better financial management.

The World Bank on the other hand expects the fiscal deficit, excluding grants, to reach 8.4pc of GDP in 2020-21, partly due to subdued economic activity and the settlement of arrears in the power sector. It forecasts the fiscal deficit (excluding grants) to gradually narrow to 7.8pc in 2021-22 and to 7pc of GDP by 2022-23 — much higher than official estimates.

The current account deficit for the next year is estimated to rebound to $4.7 billion against the current year’s revised estimate of $1.5bn instead of the budget estimate of $6.8bn. Over the following two years, the current account deficit would keep growing to $5.5bn in 2022-23 and $6.1bn in FY2023-24.

Foreign exchange reserves are estimated to keep increasing over the medium term to provide import cover of three months in the current year to 3.2 months next year and 2022-23 before reaching a 3.4-month cover in 2023-24.

The government projects the economy to recover from the pandemic to sustainable and inclusive growth in the medium-term at a time when the severity and duration of the pandemic remain increasingly uncertain.

Yet, it commits to adhere to its institutional reform agenda in key areas including reforming the corporate tax structure, improving the management of state-owned enterprises, and improving cost recovery and regulation in the power sector and promises to focus on improving the real sector through inclusive growth in agriculture, industrial and services sectors.

In the fiscal framework, the strategic priorities of the government include optimal revenue mobilisation, broadening of tax base and increase of tax net, reduction in tax expenditure, efficiency in revenue administration, increase in the ratio of direct taxes and simplification of procedures for facilitation of taxpayers, according to the finance ministry.

Ambitious revenue projections have been worked out for the medium term. It thus projects gross federal revenues to increase by Rs1.6trillion in one year from Rs6.38tr this year to Rs7.99tr next year and then reach Rs8.77tr in 2022-23 and Rs9.83tr in 2023-24.

Net federal expenditure is, on the other hand, projected to remain under tight control yet keeps increasing from Rs7.334tr this year to Rs8.056tr next year — up by about Rs720bn.

The provincial governments are now targeted to provide a cash surplus of Rs210bn during the current fiscal year to Rs440bn next year, followed by Rs540bn in 2022-23 and Rs640bn in 2023-24. “In order to attain the projected overall fiscal balance, the provinces will be required to have the desired levels of provincial surpluses by increasing their own revenues and rationalising the expenditures,” the finance ministry says.

This is based on the federal government’s much-repeated argument that the centre has been facing major fiscal challenges since

the introduction of the 18th constitutional amendment and the 7th National Finance Commission Award that transfers 57.5pc of the divisible pool taxes as well as straight transfers to the provinces, constituting almost 59.7pc of the gross federal revenues, which leaves very limited fiscal space for current and development spending.

Also, the government will continue the existing policy of the imposition of the petroleum levy, gas infrastructure cess, surcharges etc over the medium-term. However, in order to introduce new streams of non-tax revenue, a comprehensive revision of existing legal frameworks will be undertaken in consultation with ministries and divisions concerned.

Published in Dawn, The Business and Finance Weekly, April 26th, 2021