Pakistan entered the new financial year on July 1 with new hopes but old fears. The ‘growth budget’ for the year, which Finance Minister Shaukat Tarin has boasted is based on a combination of ‘trickle-down’ and ‘bottoms-up’ approaches, carries significant taxes and other incentives for businesses, while promising some cash handouts for the lower-income segment to stimulate the economy and help it recoup quickly from the IMF-induced slowdown and the impact of the pandemic.

If implemented, the measures announced – such as the Rs 2.1 trillion federal and provincial development programmes – will put the economy back on the road to growth, creating some space for the lower segment of the population. There is little doubt about that. But will it? Scepticism around the budget and its targets linger.

The biggest challenge to the government’s plans to implement this budget arises from the revenue side, as it targets an almost 24% increase in tax collection – up to Rs 5.83 trillion in the current fiscal year, from the Rs 4.7 trillion it raked up last year. The tax target appears difficult to achieve as the projected revenues from the other sources, such as privatisation of state assets are spawning uncertainties over the massive spending plans to jumpstart the economy, and the absence of a strategy to address the myriad structural problems that have kept successive governments dependent on foreign debt and largesse is not helping alleviate these worries.

The government is anticipating that the targeted economic growth of 4.8%, with an inflation rate of eight percent, will generate a natural growth of nearly 13% in tax revenue. The rest is expected to come from new taxes aimed at increasing GST collection by 33% and income tax by 22% from the last financial year, allied with better administrative and enforcement measures that include punishments for tax evaders and documenting the economy. These are promises almost every government makes in their budgets to fill the holes in the nation’s finances but never lives up to. With the government entering the fourth year of a five-year term, few expect it to enforce such harsh measures as arresting tax evaders or forcing traders to pay taxes. It has already backtracked on a proposal to tax mobile phone calls and internet services to the tune of Rs 100 billion.

On the non-tax revenue front, the estimates of collection of Rs 610 billion through the petroleum levy (but without massively hiking petroleum prices) and Rs 252 billion through the sale of state-owned enterprises are too optimistic to realise. Last year, the government had estimated raising Rs 100 billion from privatisation; it didn’t raise even a single paisa, so how will it achieve the heftier target this year? Given that a hike in the price of petroleum always comes with across-the-board inflationary pressure and privatisation with political costs, the government is more likely to face a larger hole in its finances than it is anticipating. Furthermore, the chances of the provinces producing a surplus of Rs 570 billion to help Islamabad bridge the budget deficit are slimmer than ever. The provincial governments are badly in need of money to invest in social and economic infrastructures, which they ignored in the last three years due to the IMF programme and low tax and non-tax revenues collection. Even if the required surplus is produced, it will not help the government in its spending plans, even if it helps narrow the consolidated deficit.

How the government intends to fill the large income hole, the budget documents do not elaborate. Either it will be forced to borrow from the domestic and international market or cut back on its growth spending plans, and the chances are it will borrow more and spend less on development. The government is already looking to borrow Rs 2.75 trillion from external sources, including expensive, commercial debt through Eurobonds and sukuks, to fill the hole in its estimated receipts and expenditures.

The ambitious revenue target – and potential collection shortfall – is not the only worry. Many analysts insist that even if the government is able to sustain its growth target, it will widen the current account gap deficit to unsustainable levels, owing to the increase in imports – and consequently in the trade gap. Financing the current account deficit may be a problem going forward if global commodity prices, especially oil, go up further and remittances by Pakistanis living abroad dwindle as projected with the reopening of a vaccinated world. With the IMF not happy with the government’s deviation from its Extended Fund Facility targets, the matter could be further complicated. The IMF has moved the Programme review to September and clubbed it with the next one, delaying release of the tranche. What happens during the review will largely define the course of the budget going forward.

The good news, however, is that the economy has shown signs of recovery in the last fiscal year as it posted a growth rate of 3.94%. The question is: Can the government convert this economic upturn into a sustained growth? So far, the odds are against it. The growth budget indicates the government’s desperation to give people burdened by the harsh IMF-mandated policies something to feel good about before the next elections. Luckily, Pakistan has largely escaped the impact of the pandemic thanks to the massive growth in remittances, enhanced flow of cheaper multilateral dollars to support the fight against Covid and the drop in imports owing to contracting domestic demand. This has given the government room to tell the IMF to back off, at least for now.

More importantly, the American pull-out from Afghanistan has given the government hope that Washington will use its clout with the IMF to secure relaxations in the terms – and probably more funding to support the growth agenda – in exchange for its cooperation with the West in the region. If this does not happen and the IMF decides to walk away, the government will be faced with a hopeless situation in ensuring fiscal and current account stability and financing its growth plan.

Nasir Jamal is Bureau Chief, Dawn Lahore. nasirjamal65@gmail.com