It’s panic time. Again.

The equation is simple as it always has been. Pakistan needs money from the International Monetary Fund hence the bulldozed mini-budget.

“The taxes have been imposed on basic consumer goods, essential inputs or capital goods,” says former finance minister Hafeez Pasha. “This will have three types of impact: firstly, it will affect growth and investment. Secondly, it will have a sectoral impact, particularly on agriculture because it has focused on agricultural inputs. And lastly, it will squeeze the middle-income groups given the range of goods affected.”

Increase in the undocumented

Agreeing that it is the middle-income groups that will be impacted, the chairman of the Pakistan Poultry Association and founder of K&N Khalil Sattar explains how the mini-budget is a double whammy for branded poultry products.

“We have to compete against the non-branded chicken. Our cost of production is more than Rs60 per kg compared to Rs4-6 per kg of a butcher in the wet market. How will we compete with the imposition of a 17 per cent tax? Additional sales tax has been levied on all imported poultry feed ingredients. About 65-70pc of the cost of a chicken is its feed so it further adds to the inflationary effect”.

Lower crude oil prices and freight charges could absorb in part the inflationary effects of the mini-budget later in the year

As it is, branded poultry products account for only 5pc of the market — a move towards higher taxation increases the incentive to remain undocumented.

“Previously, crude edible oil was exempted but was taxed once it was refined. Now the crushers of mustard seed and rapeseed are taxable. It will not impact the market in terms of price, but decrease the limited documentation that was existing,” says Shakil Ashfaq, former chairman of the All Pakistan Seed Extractors Association and CEO of Shujabad Agro.

Making an argument for documentation, former state bank governor Saleem Raza argued that to claim refunds that could amount to $272 billion, businesses would have to be registered so the mini-budget should increase documentation which is an objective of the government.

A new circular debt?

“Imposition of sales tax on inputs for pharmaceutical products will be a big problem for us because cash flows will be impacted — unless they agree to give on-time refunds on purchase and not consumption,” says Pharma Bureau Executive Director Ayesha Tammy Haq.

Speaking about refunds, one observer commented on the possibility of a new circular debt being created. The refunds will keep accumulating which will be dangerous for the economy as a whole since it will impact borrowing as well. Historically, the government is not known for giving refunds on time.

However, this notion was refuted by Mr Raza. “Circular is caused by losses that the government has to cover. If the government can create a tool for refunds where they are parked as they are received and then disbursed then there should be no problem,” he said. Thus liquidity of several key sectors hinges on the ability of the government to intelligently manage its revenues.

A tiny silver lining

Locally-assembled mobile manufacturers may be better off, ruminates Shahrukh Rohilla, Director Sales of Xiaomi Technology. “The taxes are not imposed on locally assembled mobiles — they are imposed on high-end mobiles that cost upwards of Rs35,000 ($200).”

So the teens that hoped for IPhones or Samsung Galaxy Notes as gifts for strong O and A level results are the ones that may be disappointed while the local mobile assemblers benefit.

Not as exorbitant as painted

“As a prior action, the mini-budget was unavoidable,” says Mr Raza. “The finance minister has done well to reduce the amount of Rs700bn committed earlier to Rs350bn. If the Rs112bn on machinery and Rs160bn on the pharmaceutical sector is adjustable and refunded, then only Rs71bn of new taxes are imposed and that is not an exorbitant amount,” defended Mr Raza.

“Inflation is likely to rise in any case — the January numbers of inflation may very well be at 13pc but the outlook of crude oil is predictable. The prices are expected to drift down from about $80 per barrel to $70. Freight charges that have contributed to rising inflation are expected to decrease later this year as well. These trends could absorb the inflationary impact of the mini-budget. And the Ehsaas Programme is well constructed enough to act as a shock absorber for the poorest,” he added.

Published in Dawn, The Business and Finance Weekly, January 17th, 2022