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Budget, The Economy and COVID-19 By M. Abbas Raza

The budget speech for FY 2020-21, followed by the press conference of the economic team needs a careful analysis to assess the manner in which the government intends to handle the post-COVID economic scenario. A cursory look at the budget reveals that it only attempts to balance the country’s financial balance sheet with a colossal deficit of Rs3700 billion to be met through unknown and unrealistic resources. It lacks planning, policy intervention and strategic measures to revive the COVID-hit economy. Despite the fact that Pakistan registered a negative GDP growth, the global concern of the recession turning into depression after about a hundred years and the cautions by the World Bank and IMF, in this regard not a single word has been said on it in the speech. On the contrary, economic managers are taking pride in paying off the interest on foreign debts and reducing government expenditure.
The government’s claim of the tax-free budget has to be perceived in the correct perspective. Implications of direct and indirect taxes and duties on domestic production is a source of revenue and is paid by the consumer, whereas adequate levy of taxes and duties on imported equivalents not only increases revenue but enables the domestic industry to utilise its idle installed capacity to an optimal level, reducing the per unit fixed cost, ensuring productivity and competitiveness.
A number of changes have been made in direct and indirect taxes. In the customs tariff structure, there has been a reduction in customs duties on ninety tariff lines from 11 percent to 3 percent and on two tariff lines from 11 percent to 0 percent. Moreover, the industries for which customs duty on some of the raw materials have also been reduced, inter alia, include butyl acetate, infusion sets, buttons, interlining/buckram, wire and rods, internet cables, beverage cans, and the food packaging manufacturing industry. Apart from the above, some changes have been made in regulatory duties for reducing the cost of doing business, the details on this account will surface with the commencement of the new fiscal year. Improving the level of protection/reducing the cost of doing business through levy/reduction of regulatory duties undermines economic principles and the functions of the NTC contained in Section 8 of the National Tariff Commission Act, 2015. Dr Hafeez Shaikh’s statement that tariff reductions are being made on thousands of tariff lines is incorrect and misleading, as the tariff changes have been made on an eight-digit level and not on the four-digit levels of the HS codes.
How these fiscal measures will impact and support the economy and trade and industry in particular, will only unfold with the passage of time. In the steel sector, the RD on the import of hot rolled coils (HRC) of iron and steel have been reduced from 12.5 percent and 17.5 percent to 6 percent and 11 percent respectively. This will indeed benefit the cold-rolled coil (CRC) processing industry but at the cost of reducing the economic value of Pakistan Steel Mills, which the government intends to privatise and which has the capacity to produce HRC. Secondly, it would increase the profitability of the CRC industry for which the consumers of the CRC will now have to pay more for locally produced CRC. In principle, if the government’s intention was to benefit the engineering sector then the import duty on CRC should have also been reduced accordingly. If the tariff reductions and adjustments on other products are also done in the same manner, the exercise could be counterproductive, distorting protection levels and creating fiscal anomalies. In other words, tariff changes proposed in the budget can only be termed as routine budgetary measures and have no specific/explicit relevance to the post-COVID economic turmoil.
The response of the minister for commerce on the issue of developing the export strategy, in the post budgetary press conference, was even more naive, as reference could only be made to the Strategic Policy Framework, the visit to African countries along with a mention of anti-export bias and cascading of tariff structures, the study and the exercise conducted way back by the National Tariff Commission (NTC) in 2015.
It is quite astonishing to note that the budget speech placed the entire burden of the depreciating economy on COVID-19, yet there was not even a single policy intervention or strategic measure which could be attributed for rescuing/reviving trade and industry as such.
It is expedient that an economy revival board is constituted, with necessary statutory powers, at the national level with presidents of major trade and industrial chambers, Pakistan Business Council as permanent members, representatives of ministries’ of commerce, textile, industries and finance, the FBR and the NTC, not below the rank of BPS 21 with its secretariat at the Ministry of Commerce. Representatives of the respective trade and industrial associations should accordingly be co-opted. The board should act as a crisis management board. TORs of the board should, inter alia, include to (i) save the economy from recession which is inching towards depression, (ii) analysis of financial, economic and trade policy interventions by other similar economies being introduced to keep their industrial productivity and competitiveness intact, (iii) determine adequate level of tariff protection for achieving optimal level of capacity utilisation, (iv) revisit tariff bindings committed under the Multilateral Tariff Negotiations held in 1992-93 under the WTO regime and subsequent unilateral tariff bindings committed by Pakistan and contained in Article II – Schedule of Concessions, (v) assess the impact of poorly negotiated Free Trade Agreements adversely affecting the domestic industry, (vi) invoking safeguard measures contained in the WTO regime for emergency situations and governmental assistance for economic development. These measures should be taken on war footing to save the economy from crippling.
M Abbas Raza
The writer is former Chairman, the National Tariff Commission.
Source: https://nation.com.pk/16-Jun-2020/budget-the-economy-and-covid-19

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