ISLAMABAD, Jan. 22 (daily business news): Pakistan’s top economists say the passage of the Finance (Supplementary) Bill 2021 (mini-budget) will lead to the documentation of the country’s economy and there will be no significant impact on inflation.
Renowned economist Dr. Ashfaque Hassan told WealthPK that there was a panic that mini-budget will bring inflationary storm in the country, but after the analysis of the bill, he found that it will not further fuel inflation.
Dr. Ashfaque stated that constant and massive devaluation of the exchange rate has already brought huge inflation. He said it was a fact that the
inflation was increasing globally, but no country witnessed the trend of constant devaluation of the currency like Pakistan.
In Pakistan, he added, currency has been devalued on the directions of the International Monetary Fund (IMF).
Dr. Ashfaque, who is a strong critic of the IMF’s bailout programs, further said that the country’s exchange rate was around Rs152.30 on May 2, 2021 and the foreign exchange reserves were around $17.5 billion.
However, he added, during that period exchange rate started decreasing on a daily basis, but on the other hand, foreign exchange reserves were
increasing and reached up to $20 billion. He said this trend was against the principles of economics when foreign exchange reserves were increasing and local currency was depreciating.
“This was not happening under the market mechanism and later, I came to know that it was done as the prior action for IMF program because it has attached four conditions for the continuation of the program including an increase in interest rate to 10 percent and to bring mini-budget,” he told WealthPK.
Executive Director of the Sustainable Development Policy Institute (SDPI) Dr. Abid Qaiyum Suleri said in a statement that mini-budget will increase
prices mainly of luxury items and the impact of the general sales tax exemption withdrawal on the price hike will not be very significant.
He said the current government, though on the advice of the IMF, took the right step to remove the distortions in the GST through withdrawal of
exemptions and levying GST at a uniform rate across the board. He said the GST reforms will also help document the undocumented sectors of the economy.
According to the official figures shared by spokesperson for the Federal Board of Revenue (FBR) Asad Tahir Jappa, the breakup of total withdrawn tax exemptions is Rs343 billion and it can be divided into three main segments — pharmaceutical with Rs160 billion, plant and machinery Rs112 billion, and goods Rs71 billion.
He clarified that Rs272 billion of tax expenditure on account of machinery and pharma is refundable or adjustable. He said only Rs71 billion of tax
exemptions on goods is the net-imposed tax which includes Rs31 billion tax on luxury goods, and Rs31 billion on business goods. Only a meagre amount of Rs2 billion is related to goods which may affect the common man.
An elaborate targeted subsidy plan of Rs33 billion has been proposed to protect any segment of population which may get affected even indirectly by the withdrawal of some exemptions, he added.
“In the mini-budget, medicines have been made ‘zero-rated’. This means that the input tax borne on packing materials and others would now become refundable.
Bringing this sector to the GST regime will help document Rs530 billion worth of undocumented supply chain. Hence their net impact on retail price
would be zero,” explained Dr. Suleri, adding, “Contrary to the common perception, this will actually help reduce the price of medicine.
Like medicines, withdrawn GST exemption on machinery is also refundable or adjustable, and not affecting consumers.”
He told WealthPK that the government also seems to be moving from tax exemptions to targeted subsidies. “After refunds and adjustments, Rs33
billion from the revenue raised through the mini-budget is allocated for targeted subsidies,” he said.
Analysts say the passage of the bill will lead to the release of the $1bn tranche from the IMF.
It will consolidate the country’s foreign reserves and also pave way for getting funds from multilateral financial institutions and the international bond market.
The government has taken steps to document undocumented segments of theeconomy because, according to the estimates, currently total volume of the retail business sector is around Rs20 trillion, but out of it only about Rs3.5 trillion is reportedly in tax net.
However, some analysts and stakeholders are also raising serious reservations on mini-budget which can adversely impact the economy.
Withdrawal of tax exemptions on laptops, cell phones and the telecom sector may hurt economic growth.
Also, increase in taxes on solar panels will jeopardise the government’s efforts to promote cheap and clean renewable energy. Likewise, increase in
tax on infant formula milk will discourage its use and adversely impact the health of infants.
It is expected that the government will take steps to subsidise these sectors to protect them from the adverse impacts of the mini-budget.
