THE government’s target for next year’s fiscal deficit at 5.3 per cent of gross domestic product (GDP) appears highly unattainable based on its past performance and recent policy initiatives.

The Pakistan Muslim League-Nawaz appears desperate to present its sixth and last budget on Friday, just a few weeks before the end of its tenure.

As part of an assurance held out to the International Monetary Fund (IMF), the government projected the fiscal deficit to decrease from 8.2pc in 2013 to 3.5pc in the next three years. However, the actual fiscal deficit ended up at 4.3pc. A similar trend was witnessed in the 2016-17 fiscal year when the country’s deficit went up to 5.8pc as against the target of 3.8pc.

During these years, both expenditures and revenues were off target. The upcoming budget will include measures to curtail the budget deficit within manageable levels. One of the important measures to reduce the budget deficit is to improve revenue collection from both tax and non-tax sources.

However, the economic reforms package announced by the prime minister last month for taxpayers, along with the amnesty scheme, will have a negative revenue impact of more than Rs90 billion. The impact is expected to be more than Rs120bn in the next fiscal year. Besides, the Federal Board of Revenue is seen missing the current fiscal year’s tax collection target by nearly Rs200bn.

The upcoming budget will include measures to curtail the budget deficit within manageable levels

“We have no plan to introduce new taxes in the budget 2018-19,” a senior tax official said, adding that minor adjustments will be made in tax rates for certain sectors.

Asked whether there is any plan to make up for these losses in revenue, he said: “How does one expect the government to take measures in an election year?”

Some steps are, however, expected to help curtail the rising budget deficit to a certain extent. At the outset, it is expected that the rupee will depreciate further in the next fiscal year to boost exports from the country. “We expecting that the next government will not manage the exchange rate artificially,” an official in the Finance Division said.

If the exchange rate is allowed to reach Rs125 against the dollar, it will help reduce the import bill of the country. Similarly, more than 50pc growth in revenue collection will be recorded alone at the import stage from collection of customs duty, sales tax and withholding taxes.

The official said this will also help the next government to avoid approaching the IMF for a bailout package.

The Commerce Division believes that a 10pc depreciation of the rupee in the past few months accelerated the growth of exports. In March, exports grew 24pc year-on-year.

The Commerce Division has proposed rationalisation of 515 tariff lines — mostly raw materials — in the upcoming budget. The duties on these raw materials range from 3pc to 20pc. The reduction in duties will also help increase exports.

A Planning Commission report projected exports to go up to $27.3bn in 2018-19 compared to $24.5bn in the current year. It was also estimated that the resurgence of global commodity prices in 2018-19 would be a positive signal for exporters.

But the report suggested that rigorous efforts are required to increase the quality of exports, diversify product range and look for new markets. With China-Pakistan Economic Corridor investments and better performance in the industrial sector, exports are expected to gain momentum and grow by 11.6pc compared to 6.3pc increase in imports during 2018-19.

On the import substitution side, budget-makers also consider imposing regulatory duties on those products which are, or can be, locally produced. Several products were already identified in this regard and will be subject to regulatory duties in the next budget.

Some progress was also seen in revising preferential trade agreements, especially in the case of Indonesia. On the revenue front, the government estimates a one-off benefit of Rs200bn to Rs300bn from the tax amnesty scheme.

But the challenge for the government is also on the non-revenue side; for example, gas cess collection fell short of the target to Rs42bn from the budgeted target of Rs142bn for the year 2016-17. The trend has remained unsatisfactory this year as well.

The only option left with the government is to control the deficit through cuts in development expenditures. According to a Planning Commission report, the fiscal policy focus in 2018-19 will largely remain on containing fiscal deficit, generating revenue, controlling spending, allowing targeted subsidies and prioritising development spending.

But the World Bank in its recent Global Economic Prospect report cautioned that Pakistan may lose in its efforts to curtail the budget deficit owing to weak tax revenues and expenditure slippages ahead of upcoming general elections. The increasing contingent liabilities related to infrastructure projects may become another factor in the widening of the budget deficit.

Published in Dawn, The Business and Finance Weekly, April 23rd, 2018