It’s all in Dar’s head

There appears a clear disconnect between budgeted numbers and tall supportive claims announced in the budget speech.

The competent accountant has left the rest to accounting gimmicks, plugging in the numbers. There is an array of fiscal incentives for industrial and agriculture sectors; however, you would struggle to find the mention of most of them in budget allocations.

An argument for pro-growth policies could be substantiated with incentives for many sectors, especially agriculture and textile. Agriculture growth may revive, which would be attributed more to low base effect than to lowering of input prices. Fertilizer prices will be slashed – to be equally shared by provinces and federal government. One can seriously doubt that Sindh and KP governments are on broad and there is nothing to substantiate the claim.

The windfall offered for textile is a pleasant surprise and that may help exports to pick from the lows. That said, textile players are not sure on the pending refunds promises. The LTF and BMR incentives may not bring expansion and new projects, until confidence is built on continued availability of gas at cheaper rates.

The government isn’t doing a bad job at collecting taxes – FBR tax revenues are revised up to 10.5 percent of GDP from budgeted 10.1 percent. In absolute terms FBR revenues are spot on target; but since nominal GDP is revised down, the picture is better in terms of percentages. But the reliance on indirect taxes and WHT taxes is doing no good to boost economic growth, as broadening of the tax base continues to take the backseat.

The revised target of non-tax revenue at 3.3 percent of GDP (budgeted:3.1%) for FY16 is not realistic. The government is eyeing Rs45 billion from 3G license from an ill-planned auction in last ten days of the fiscal year. There is only one player (Telenor) which might be interested; even if the auction is successful, the payment would not be made right away. The more absurd allocation is of the Rs75 billion budgeted for 3G auction in next year. How can the government collect Rs120 billion from a market where the returns from previous auction have not materialised yet?

Similarly Rs50 billion is budgeted from privatization in FY17. With the IMF programme ending, elections coming up, and the usual performance in view – this would remain an elusive target.

Development expenditure is projected higher next year; federal PSDP target set at Rs800 billion is 21 percent higher than outgoing year’s revised numbers and similar is the increase for provinces. However, the development number is overstated as Rs100 billion for temporarily displaced people is part of PSDP.

Development spending is focused on power and roads network which is good for enhancing growth in short term; but in the absence of industrial expansion, it may fuel import growth in the medium to long term. The dire need is to incentivize private sector to come up with green field projects for both export oriented industries, and those involved in imports substitution.

But seeing the financing estimate of budget deficit, higher reliance on domestic banking sources may crowd out the private credit. Bank borrowing for fiscal financing is budgeted at Rs453 billion in FY17 as against the revised number of Rs198 billion in the outgoing year. There is no element of SBP borrowing in it. So either the government will let the private credit to compromise or revert to note printing, once the IMF programme is over.

None of the scenario is good as in case of the former, the broad based growth is compromised and the latter is inflationary in nature. Then there are fears of slippages in fiscal deficit; not only due to shortage in non tax revenues, but also from lower provincial surpluses.

The number is revised up by 13 percent in FY16 to Rs337 billion and government is eying Rs339 billion in FY17. The tactic used by Dar for provinces to show high surplus is by paying, in essence, interest on that cash. Let’s see how long the provinces will keep on running this practice, as every federating unit wants to expand development spending close to elections.

There are other elements of financing which are too ambitious as well. Case in point is the Rs105.5 billion of sovereign bond and Rs79 billion on Sukuk issuance. This implies at that government is eyeing to raise $1 billion from Euro Bond and $750 million from Sukuk issue in FY17. In the outgoing year, against the budgeted $1 billion government could only fetch $500 million at exuberant rates. And raising $1.75 billion in upcoming year will be an uphill task.

The bottom line is that government may lower the fiscal deficit below 4 percent by having higher provincial surpluses; but its financing would still be a challenge. In the process, either growth or inflation targets may get compromised in the medium term. –Business Recorder