Budget review: benefits should be distributed equitably among all-I

Every year, Institute of Policy Studies constitutes a task force to review the federal budget. The review alongside is prepared by a task force of renowned economists. Budget for the financial year 2007-08 was presented by state minister for finance on June 9 in the National Assembly in a distinctive environment.
This was the fifth budget presented before the current assembly. As such it is the first time in the history of Pakistan that an elected government got the opportunity to run the national economy continuously for five years. The same team was handling the economic affairs of the country even before 2002 elections.
It is generally regarded enough time for a government to strengthen and develop the national economy and thus provide its fruits to the masses. This budget gained added significance because this was being presented in an election year and the country is facing judicial crisis which can influence both politics and economy of the country. Keeping in view the aforesaid situation in the country, Institute of Policy Studies prepared the following review on the current economic situation and budget 2007-08.
According to Economic Survey, released a day before the budget was announced, GDP growth rate of the country in 2006-07 fiscal was 7 percent. The average GDP growth rate in the last five years was 7 percent while in the last four years it was 7.5 percent. The survey said that Pakistan is now in line with other rapidly growing Asian economies - China, India and Vietnam.
The 7 percent growth rate was fuelled by 5 percent growth in agriculture, 8.4 percent in manufacturing and 8 percent in services sector. The share of service sector in GDP growth was 60 percent while that of agriculture and manufacturing together was 40 percent.
According to the Economic Survey, per capita income rises to $925 which was $586 in 2002-03. Foreign exchange reserves increased to 13.7 billion dollars. Remittances from overseas Pakistanis reached 4.45 billion dollars in the first ten months of 2006-07 which is 22.6 percent more than remittances received during the same period of FY 2005-06. It is expected that remittances will reach 5.5 billion dollars by the end of financial year 2007-08, which will be a record in the country's history.
Foreign investment during the first ten months of the financial year stands at 6 billion dollars (4.5 billion dollars is direct investment while the rest is portfolio investment). It is expected that foreign investment will surpass 6 billion dollars by the end of financial year. The government claims that it will be 13 to 14 times more than the foreign investment seven or eight years ago.
Besides this 'extraordinary' economic performance during the last four years, as the government claims, the survey also talks about challenges the economy is faced with. Inflation rate grew from 7 to 7.9 percent. Food inflation rises to 10.24 percent. However independent sources say food inflation is 15 to 20 percent. These inflation figures are of quite concern because inflation directly affects the poor, low income and fixed income groups.
These challenges cannot be met with a few relief packages but by a comprehensive strategy. Condition of foreign trade is also very depressing. During the first ten months of the financial year, exports increased by only 3.4 percent ($13.9 billion) while the already huge imports further increased by 9 percent.
Trade deficit during these ten months increased from 9.5 billion dollars to more than 11 billion dollars. It is worth mentioning that trade deficit in 1999, when the present government came in to power, was only 1.74 billion dollars.
Current account deficit from July 2006 to March 2007 was 6.2 billion dollars which is 4.3 percent of the GDP. During the last financial year it was 4.6 billion dollars (3.6% of GDP). The government's argument about budget deficit and the overall financial deficit is that presently, all the nations including both developed and developing (except China) are facing deficits. However, we need to keep in mind whether our economy is able to sustain such a huge deficit, and are there any plans in the next budget which can at least reduce it.
THE OTHER VIEW:
As far as the 'promising' figures of the government are concerned, second opinion on these cannot be ignored. According to Economic Survey, even the 7 percent growth rate is less than the average growth rate of developing countries which is 8 percent. Even in South Asia region, we are behind India and Sri Lanka whose growth rates are 9.2 and 7.5 percent respectively. Foreign remittances have increased.
However, this is now a global phenomenon, and other countries have also recorded tremendous growth in remittances. Remittances of Bangladesh are not that much less than Pakistan.
Foreign exchange reserves which are 13.7 billion dollars and will reach 15 billion, including bonds, are not that high enough keeping in view the huge and continuously increasing imports. Increase in foreign investment is also a global trend. Foreign investment across the world has shown tremendous growth, while in Pakistan it is confined to only a few sectors.
During the first ten months of the financial year, foreign direct investment in Food, Beverages and Tobacco sector was 492 million dollars, 449 million dollars in Oil and Gas sectors, 1.36 billion dollars in Telecom sector while 871 million dollars were invested in financial sector. Thus three-fourth of the foreign investment was only in these four sectors.
It is worth mentioning that during the financial year 2005-06 a major portion of foreign investment was that of privatisation proceeds. This year the share of privatisation proceeds is comparatively less. However, foreign investment came in the form of banks' merger and acquisitions while a tobacco group bought shares of one of the tobacco companies. Standard Chartered Bank invested some 400 million dollars to merge Union Bank.
With a 300 million dollars investment, Phillip Morris bought the Lakson Tobacco Company. These investments neither helped create any new assets nor started any production process. They did not even provide new employment opportunities. In this debate as a whole, increasing trend of Pakistani capital going abroad for investment should also be kept in mind.
Growth of commodity sector is very important for sustained economic development. The present growth is mainly due to growth in services sector, increase in remittances and the financial rewards Pakistan is receiving for allying with US in the so-called 'war on terrorism'. There was no considerable growth in agriculture sector except the better wheat and sugarcane production due to sufficient rains.
Industry is in crisis affecting exports. Exports of raw cotton reached $3 billion due to crisis in textile sector. For the last four years the government is saying that increase in imports is due to new machinery being imported, which will improve production and thus increase exports. However, the results are yet to be seen.
It must be noted that no comprehensive strategy was devised to use 26 billion dollars remittances and 10 to 12 billion dollar foreign aid, received during the last several years, for using the same for productive purposes. Spending of these huge amounts in stock exchange and property businesses, the non-productive sectors, increased as result. This also resulted in the culture of lavish spending, living beyond means and conspicuous consumption.
Dependence on loans is continuously increasing. Total foreign loans are almost 38 billion dollars while domestic loans have reached 4700 billion rupees. Energy crisis is increasing while it is a threat to economic stability and development. Despite increasing energy needs, must for sustained economic development, there was no increase in installed capacity for electricity generation, as it remains 19400 megawatt.
POVERTY, INEQUALITIES AND UNEMPLOYMENT: The government claims that poverty was reduced due to its economic performance in the last few years. According to last year's figures, given by the government, the number of people living below the poverty line decreased from 34.46 percent in 2000-01 to 23.94 percent in 2004-05. The government also claims that poverty ratio further decreased in 2006-07 due to economic growth. Despite these claims one cannot see any improvement in the living standards of people on the ground. Moreover, definition of poverty is also an issue.
According to international standards those who earn less than 2 dollar a day are below poverty line while those who earn less than one dollars a day are considered in extreme poverty. Experts are of the opinion that according to such definition over 60 percent Pakistanis are poor. Even according to an official survey, Pakistan Social and Living Standards Measurement Survey 2004-05, over 75 percent Pakistanis believe that their living standards have either deteriorated or remained the same.
Even if one leaves aside the definition issues, according to government's claims, more than 40 million people are poor and as such there is a need for a comprehensive strategy to cope with this problem focusing on human resource development. Much is said about human resource development in the budget but it lacks an effective strategy.
The government also claims that besides reduction in poverty, huge employment opportunities have been provided. State minister for finance claimed that more than 10 million people were provided employment during the last five years. No doubt, some sectors particularly telecommunications and construction have demonstrated expansion and growth. But the claim of 10.6 million jobs is not reflected in the real situation of employment in the country. Here again is the issue of definition.
According to official definition, every person who has remained at work even for one hour a week during this particular period is employed. All those housewives are also considered employed who are helping their husbands and families without getting any monetary gain. Such a definition may help in portraying a rosy picture in government reports but it does not in any way reflect the situation of the employment.
Due to high rate of population growth we need to adopt a development model which provides more and more employment opportunities. Presently our employment elasticity of output is only 0.4. In this way the 7 percent economic growth can only help increase the ratio of employment opportunities by 2.8 percent. On the other hand the employment elasticity of output in Bangladesh is 1.1 and when growth rate is 7 percent, employment opportunities increase by 7.7 percent there.
Economic Survey admits that wealth and income disparity is increasing. Share of 20 percent richest people in total national consumption is 39.4 percent while that of 20 percent poorest is only 9.5 percent. It means that richest 20% are spending 400 percent more than the poorest. This situation can also be stated in another way that in every 100 rupees in the national economy 10 percent highest income group gets 40 rupees while the 10 percent lowest income group gets only 3 rupees.
Good governance must be among the top priorities of any government. With regard to economy, the good governance demands that there must be sustained macro-economic development. Budget should not be in deficits, instead, when the growth is fast like this, it should be surplus. Inflation must be low and foreign exchange reserves at a satisfactory level.
Besides macro-economic stability, it is the responsibility of the government to provide security to life and property, improve law and order situation and enforce rule of law. It is also important that benefits of economic development should be distributed equitably among all. The government also needs to ensure basic socio-economic facilities like sustained energy supply, a better public transport system, standard education including technical education, health-care facilities, affordable and standard housing, clean drinking water, improved sewerage system, provision of justice, special care of underprivileged people and enhanced defence system.
Keeping in view the present economic conditions of the country, it was expected that budget would address all the aforesaid challenges and will come up with a comprehensive strategy to provide relief to masses. However, while preparing the budget, it seems as if only short term political mileage was kept in mind and as such it lacks any thing towards developing comprehensive economic strategy.
IMPORTANT FEATURES OF THE BUDGET ARE AS FOLLOWS:
-- The government says that according to medium term budget framework, the consolidated outlay of the budget is 1874 billion rupees.
-- The total expenditure is estimated at 1599 billion rupees, including current expenditure of 1056 billion expenditures and 543 billion rupees development expenditure. In comparison with last year, current expenditure has been increased by 2 percent while development expenditure by 37.7 percent. Thus the current expenditure will reduce from 72.4 percent to 66 percent.
-- Available resources are estimated to be 1394 billion rupees which were 1100 billion rupees last year.
-- Share of provinces in federal receipts will be 466 billion rupees which is 23.2 percent more than 2006-07 fiscal.
-- During 2007-08, 259 billion rupees will be received from foreign resources, which is 8 percent higher than the last financial year.
-- Rs 275 billion have been allocated for defence. Last year, allocation for defence was 250 billion rupees.
-- Besides the record outlay, budget deficit (Rs 398 billion) is also a record and it will be 4 percent of the GDP.
One thing about the budget is worth appreciating that now medium term budget framework is also kept in view and annual budget is prepared (as claimed by the government) in line with medium term targets. However, to cope with the trade and current accounts deficit and other challenges, there is a need of a strategy which could enhance industrial production and particularly develop export oriented industries.
It depends very much on to what extent the domestic investor is confident about economic sustainability and the government's economic policies. The budget has, however, confused the industrial and business community, rather than signalling it a clear direction. Apart from some isolated steps, no comprehensive plan is presented in the budget.
MEASURES FOR TRADE AND INDUSTRY: Withdrawal of duties on raw material is a good step, but adjustment of sale tax is a matter of concern for business community. One percent duty has been imposed on all imports, to discourage imports as explained. However, this is not understandable.
One percent duty will not stop unnecessary imports. It will increase the prices of the already expensive industrial requirements. The government should have levied substantial duties on unnecessary imports particularly of the luxury goods. Budget is silent on such an approach.
(To be concluded)