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First quarter developments

First quarter developments

IT may not make for exciting reading but the quarterly reports of the State Bank are one of the few places where we get a detailed, and largely objective, view of the economic situation. The latest such report was released on Monday, and though it tells us that stabilisation is being achieved, that reserves are rising and the key deficits — fiscal and external — are shrinking, a closer reading shows that the manner in which this is being achieved is so haphazard and short term in nature that a large share of the costs are being passed on to the poor in the form of price pressures.




Take the example of the fiscal deficit. For a few months now, the finance ministry has been boasting, through press releases and public statements given by Hafeez Shaikh, that the government succeeded in securing what they call a “primary balance” in the first quarter of this fiscal year, the period from July to September. The term ‘primary balance’ is technical in nature, but it’s enough to understand it as the difference between revenues and expenditures minus debt servicing. The reason this indicator is often used to measure the fiscal health of a poor country is because it provides the creditors of the country the best way to gauge how well that country can continue shouldering its debt service obligations.

This might not be the best indicator to use when determining whether a government is delivering on its commitments to its own citizenry, however. It is designed solely for the creditors, both domestic and foreign. And in Pakistan’s case, the country had a negative primary balance until the first quarter of this fiscal year, when it registered its first primary surplus equal to 0.6 per cent of GDP. This development was touted on numerous occasions by Hafeez Shaikh as a big success, but when we take a detailed look at how it was achieved, we find less reason to crow.

The report notes a decrease in the deficits on the fiscal side, an increase in revenue collection, and a reduction in expenditure growth while development spending continued apace at 30pc growth (though there is a story embedded here too because ruling party MNAs say they don’t see any of this development spending and a substantial proportion of the development releases have come under a heading known as ‘security enchancement’).

The real story begins when you start adding up the numbers to see how much of an improvement there really is.

The real story begins when you start adding up the numbers to see how much of an improvement there really is, and more importantly, where it has come from. FBR taxes grew 15.2pc in the first quarter of this fiscal year compared to 8.8pc growth last year, the report says. A large part of the increase is attributed to an increase in the rate of sales tax, followed by reinstatement of taxes on telecom services (which were suspended due to a court order last year), followed by an upward revision of tax rates on salaried people, rising interest rates (since income earned from interest on debt is taxed, and those rates were also increased in the last budget), and then an upward hike in the federal excise duty and abolishment of zero rating for five “export-oriented” sectors. Meaning there was an intensification of taxes on those already paying. And it gets better.

“Despite this improvement, the FBR managed to achieve only 17.3 percent of the annual target of Rs5,555.0 billion for FY20. This means that tax revenues would require a substantially higher growth in the remaining 9 months of the year to achieve the full year target,” the report says. Translation: there is a lot more to come. And it gets better.

Look next to see where the biggest increases in revenue collection have come from. Consider indirect taxes that account for more than 63pc of total FBR taxes, and whose incidence is highly regressive, meaning they hurt the poor more than the rich. Their growth was 14.3pc in the first quarter compared to the same period last year. But a closer look reveals where the bulk of this growth came from: increase in the price of petrol, diesel and electricity.

Sales tax, which is the largest head in indirect taxes by a long shot, alone accounted for more than half of the total increase in FBR taxes. “The major contribution to the increase in sales tax came from POL products,” says the report (POL refers to petroleum group products, like petrol, diesel and kerosene).

“This is explained by the hike in prices and sales tax rates on most of the petroleum products,” it continues. Sales tax rate on petrol, high speed diesel, kerosene and light diesel oil was 11pc, 23pc, 8pc and 4pc respectively until it was changed to a uniform standard 17pc in the latest budget. Suddenly sales tax collections jumped.

“Another major contributor to the higher sales tax was electrical energy; collection from this segment grew 69.3pc to Rs22.0 billion, as compared to a decline of 1.3 pc in the corresponding period of last year,” the report continues. “This was due to the upward price adjustments in tariffs during Q1-FY20.”

Between POL and power, they explain 36pc of the total sales tax collections. The other large category is labelled “others”, which accounts for 44pc of the collections, and where a simple increase in the sales tax rate explains most of the increase.

This is true across the board. The current account deficit, to take another example, has also been narrowed, but largely by a sharp contraction in industrial imports and especially petroleum products. There was a $3.2bn decline in overall import payments in the first quarter, the report says in a footnote, of which $1.2bn was in energy alone, which in large part is explained by the overall slowdown in the economy, lower oil prices, and a shift away from furnace oil and LNG for power generation.

Every claim this government is making of success on the economic front disintegrates when examined closely.

The writer is a member of staff.

[email protected]

Twitter: @khurramhusain

Published in Dawn, January 9th, 2020

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