Budget Special: ‘Fueling’ questions

‘No new taxes’ in the FY24 budget, a headline on the website of this newspaper said after the presentation of the budget on June 9. Petrol and petroleum products were no exception. Despite the ballooning fiscal deficit, no new levies were imposed on them.

Budget makers were under pressure. They were obligated to follow the instructions from the International Monetary Fund (IMF). The Fund has been insisting that Pakistan should meet all its budgetary targets.

Before unveiling the budget document, Prime Minister Shahbaz Sharif underlined that “no hurdle was now left” in signing a staff-level agreement between Pakistan and the IMF as the country has already met “all” prior conditions despite economic hardships.

The IMF has made it clear that Pakistan needs to eliminate subsidies, increase fuel prices, ensure a market-based exchange rate without any governmental intervention, and improve tax collection.

Only on Thursday, the IMF resident representative for the country had told Reuters that for an agreement, Pakistan needed to restore the proper functioning of the foreign exchange market, pass the fiscal year 2024 budget consistent with (the IMF) programme objectives, and secure firm and credible financing commitments to close the $6 billion budgetary gap.

It remains to be seen whether major global players can be enticed to invest in bonded bulk storage policy for crude and petroleum

Pakistan badly needs to generate more revenue. With an abysmal record of broadening the tax base, one easy way to increase revenue is by levying additional fuel tax. The IMF, too, is demanding it.

Levying taxes on petroleum products is one of the easiest ways for governments all around the globe to generate revenues and add to their coffers. As per an Organisation of the Petroleum Exporting Countries report, taxes constituted some 51 per cent of the total price paid by the customer for fuel in India in 2021. In the UK, it was 59pc, whereas the G7 average hovered around 51pc. The rate of tax incidence on petrol is high in most countries of the world.

As per media reports, Pakistan currently levies a tax of Rs50 on each litre of petrol sold in the country. Days before the announcement of the budget, the common speculation was that an additional tax of Rs10-20/litre would be levied on gasoline and other petroleum products.

That did not materialise.

But there was a caveat in the statement made by the prime minister on the issue of IMF conditionalities. While insisting that Pakistan has met almost all the conditions of the IMF, the one or two that were still to be implemented and would be done once a final agreement between the government of Pakistan and the IMF is announced.

What can those “one or two” remaining points “still to be implemented” be?

Some are already insisting that, as per the budgetary documents, the government, besides increasing the super tax on corporates, is also set to increase the petroleum development levy from the current upper limit of Rs50 per litre.

Fortunately, though, with bears in control, global crude markets are soft now. Despite the Saudi output cut for July, markets have failed to spike. That benefit could easily have been passed on to the end users in normal circumstances. In the current circumstances, though, with Pakistan desperately in need of generating revenue, that seems difficult.

And this would erode Pakistan’s business competitiveness further. As a result, the economy would only further slow down.

However, from an energy perspective, there were some positives too in the budget speech. Building up energy reserves in the country should be a strategic priority for Pakistan. Even from a defence perspective, Pakistan needs to have ample storage capacity within the country. Not much emphasis has been given to this issue in the past.

The very idea of bonded bulk storage policy for crude and petroleum products is thus an idea which needs to be supported. However, it remains to be seen whether major global players could be enticed to invest in any such adventure in a country where political instability is at its peak.

Incentives for solar and hydroelectricity projects also remain crucial to the success of Pakistan. Electricity output from its coal assets, too, needs to be boosted in a big way. However, Pakistan is amid a climate crisis which the big picture needs to factor in, but that seemed missing in the budget speech. For a government fighting for its political survival virtually daily, that seemed a long shot.

A weak government dependent on dole-outs from the IMF, with political instability in the country at its peak and no effort in sight towards resolving the issues politically, several mini-budgets could be in for us during the next financial year, especially after the elections, ‘constitutionally’ due later this year.

Ahmed Kamal
CEO, Kamal Group of Companies

The budget is a combination of both positives and negatives. The positive thing is that the government wants to stop currency devaluation and slow down inflation.

The negative thing is that it does nothing to address our longstanding problem of a very narrow tax base and collection. Instead of moving towards documentation of under-taxed sectors like retail, real estate and agriculture, which form almost three-quarters of the economy but pay less than 2pc of the total taxes, the budget punishes those who are already documented and paying their taxes. This sends a wrong message to the people and incentivises tax evasion.

Steps like creating a withholding or indirect taxation regime for tax non-filers will not produce any results. Rather, it punishes honest taxpayers more than non-filers. If we want to document the economy, and boost tax revenues, we will have to take steps to make dirty money redundant. Undocumented persons should be forced to pay penalising tax rates on purchases of cars, land, air tickets and everything. There’s no other way of expanding the tax net.

Azizullah Goheer
Secretary General of the Pakistan Textile Exporters Association

While the budget, given the prevailing scenario, is balanced, no directions for industrial progress, export promotion, reduction in the cost of doing business and enhancing the competitive edge of Pakistani goods in the international market are given.

Contrary to expectations, no roadmap is proposed for payment of outstanding refunds and abolishing the disparity among provinces on energy prices. The foremost objective of the budget is to give direction and fillip to manufacturing, business and trade, enabling these sectors to optimise the utilisation of available resources to maximise their output, increasing their contribution and share to GDP.

No heed had been paid towards this most important sector of the national economy, and architects of the budget have failed to realise the significance of major irritations besetting the economy and outline a strategy for their solutions. There are no measures to help the textile export sector reduce its cost of production and become competitive in global markets.

Syed Nabeel Hashmi
Former chairman of Pakistan Autoparts Manufacturing Association

Years and years of annual budgeting have made our budget document unreadable and immune to changes. To spend with open hands is the only theory it follows, while Islamabad is deluded about how and from where the income will be generated. The ministries and departments ordained to make policies and directions remain cosy in their cocoons, leaving the others to worry.

The promised solar incentives will remain under-utilised due to the stoppage of solar financing by the SBP over the last many months. Meanwhile, the Discos and Nepra are bent on further reducing the uy-back rate, making solar unit cost negative.

The laptop incentive is another such scheme. While I appreciate the thought behind it, we cannot benefit fully from such plans without technology transfer and local brand creation. The auto sector and much of large-scale manufacturing remain almost shut. The government preferred to remain silent on this revenue generation issue. On the financial side, I expect the stock market to take another deep dive.

Published in Dawn, The Business and Finance Weekly, June 12th, 2023

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