Brimming with excitement bordering on the histrionics that one normally associates with political rallies, trusted Mian Nawaz Sharif kinsman, Federal Finance Minister Ishaq Dar, presented what he insists is a “poor-friendly” Federal budget in the National Assembly (NA) on June 5. Detractors do not share the palpable enthusiasm of our “man for all seasons”, they say that cosmetic taxation aside this is a “pro-rich budget”.
The bureaucratic culture endemic in the Finance Ministry does not encourage “out of the box” thinking. The fundamental requirement of the on-going IMF Programme, reduction in the “fiscal deficit,” remains their prime objective. Based on rather fragile and unrealistic assumptions, we could well see a series of mini-budgets circa 2014-15 to meet the quarterly quantitative performance of the IMF. An “Institute of Policy Reforms” (IPR) Summary noted rather sarcastically, “budget aspirations can only be achieved by a combination of wishful thinking, involving over-optimistic projections and through the adoption of some creative accounting techniques”, unquote.
According to IPR, viz that Pakistan’s (a) ranking of 107 in the “Ease of Doing Business Index” of the World Bank/IFC in 2013 fell in 2014 to 127 (b) our ranking of 146 in the Human Development Index of UNDP compares with 135 of India and 142 of Bangladesh (c) The Global Competitiveness Index of the World Economic Forum (WEF) ranks Pakistan at 129, as compared to 61 for India and 109 for Bangladesh (d) is ranked below India in the Food Security Index by the Economics Intelligence Unit (EIU) of the “London Economist” and (e) is in the ‘high alert’ zone of the Fragile States Index of the Institute of Peace, Washington,” unquote.
Any govt unable to meet its expenditures through its own resources borrows more from local and foreign lenders to bridge the gap (fiscal deficit), thereby increases the public debt of an economy. A whopping Rs.1.596 trillion (two-fifth almost (39.03%) of the 2015-16 Federal Budget’s total outlay of Rs.4.089 trillion) during 2015-16 will go to public debt retirement and payment of interest on its huge borrowing. The govt has to pay Rs 6 billion every quarter to the commercial banks for the circular debt parked in their local syndicate “Power Holdings.” Expending Rs.111.219 billion on foreign debt servicing (interest payment), repaying the principal amount will amount to Rs.316.37 billion with domestic debt servicing consuming Rs.1.168 billion. Combining the amount of federal and provincial development expenditures of Rs.1.514 trillion for the current fiscal year exceeds outlay for the public sector development program (PSDP).
Notwithstanding the increase of taxation on unearned capital income and capital gains, many of the more radical proposals by the Tax Reforms Commission (TRC) have not been adopted. These include the withdrawal of special tax privileges of VIPs, measures to tax foreign income of residents and inclusion of mechanisms for checking transfer pricing. Indeed, some measures proposed will add to the cost of living burden of the poor. The more oppressive taxation and other measures have not been explicitly highlighted. Slashing subsidies to the power sector will mean a 15% – 20% increase in electricity tariffs, sooner rather than later.
Having mixed feelings about private investment picking up pace, the business class feel that idle private capital is likely to flow into trading, real estate and construction but not towards industry. Banks put most of their money into PIBs instead of lending to the private sector, this stunts growth. Only two banks, Allied and Bank Al Habib, out of the nine topmost commercial banks are more into advances than others. If Banks do not take risks on the basis of projects and proposals, but continue to go the easy route of lending to the govt only, and those who really don’t need to borrow in the first place, growth and employment will remain a fantasy. This forces budding entrepreneurs to borrow from the informal sector, their businesses will remain in that sector indefinitely, and tax to GDP ratio will keep lagging. PPP stalwart Aitzaz Ahsan quoted figures showing a reduction of more than 100000 in active taxpayer’s list in 2013 compared to 2012, in any case it is ridiculous that less than a million Pakistanis bear the burden of more than 180 million. This must be drastically changed while there is not much tax relief the health insurance scheme and the PM’s youth programme will be received well by the people. Though under-utilized by 6% in 2014-15 the continued commitment to the “Benazir Income Support Programme (BISP)” is welcome.
The PSDP of Rs.700 billion out of Rs.4.3 trillion (only 16% of the total Federal Budget) is nowhere close to what the economy needs. Serious infrastructure and social deficits retard economic activity and cause hardship to the people. With modest growth for the last seven years, the economy needs a strong stimulus of about Rs.1000 billion, effectively the PDSP is only about Rs.580 billion. Rs. 100 billion provision for resettlement of Internally Displaced Persons (IDPs) or Rs.20 billion provided for the PM’s Youth Programme are not investments, they are development expenditures. The PM having taken note one may expect some positive changes! Water remains the biggest cause for concern, however Federal allocation for the Water Sector has been reduced 24% from Rs.46 billion to Rs.30 billion. For a water-stressed primarily agri-economy country, this is not only alarming but disappointing. With severe law and order problems, abating but continuing, what has been specifically allocated for the “National Action Plan”? Why have funds not earmarked separately for NACTA? In the face of India’s latest arms acquisitions, are the defence allocations enough?
Emphasis should have shifted from stabilization to the revival of the economy and providing significant relief to the people. Privatisation Commission Chairman Mohammad Zubair said that while the govt was committed to generating space facilitating the private sector to actively partake in the country’s development, the low private sector investment poses a challenge. Dr. Hafiz Pasha says, “successive govts have resorted to creative accounting practices to create illusions and the investment figures given in the Pakistan Economic Survey are exaggerated.” A back-handed compliment of sorts from Hafiz Pasha should enthuse Ishaq Dar, “Pakistan’s future holds the promise of very high returns if the private sector is persuaded it to invest.”
While our enthusiastic Finance Minister went overboard in tongue-in-cheek claiming that 2.5 million jobs will be created because of the new Budget, the “China-Pakistan Economic Corridor” (CPEC) is a game-changer that will certainly kickstart the economy. Budgetary woes aside, for that credit must go to Mian Nawaz Sharif and his Foreign, Economic and Planning colleagues.
