The annual budget, being a document presenting not only a balance sheet of the central government but also an indicator of its economic policies and priorities, may be gauged considering three Ps: the Performance of the economy during the outgoing fiscal year; the Promises that the budget comes up with and the Prospects that it presents. The federal budget for fiscal year 2014-15 is the second one presented by the current government with just over a year in tenure. This brief review takes into account how the national economy has fared during this regime's first year in power, what are the major challenges facing the national economy as of today, and what do the budgetary measures and proposals mean for the country's economy in days ahead.
PERFORMANCE - THE STATE OF AFFAIRS Having a detailed look at the Pakistan Economic Survey 2013-14, one finds that the state of national economy remains far from satisfactory. Many of the issues confronting Pakistan economy are perennial, and not necessarily the result of economic management of the year 2013-14. These include: Fiscal Deficit, Debt, Balance of Payments problems, Lack of Capital Formation etc. However, economy has not fared any better in the outgoing fiscal year as well.
Economic Survey records the overall GDP growth rate at 4.14% as against the growth of 3.7% during 2012-13. The survey claims that it is the highest growth rate during the past six years. This rate has been realised due mainly to a turnaround in the industrial sector, which grew at 5.84% as against 1.37% in the previous year. The growth in the agriculture sector, however, has been disappointing registering 2.12% as compared to the 2.82% of the previous year. Services sector's growth also slowed down slightly to 4.29% as against 4.85% in the last fiscal year.
The overall performance of the economy during the outgoing fiscal was a mixed bag. There were some positive developments but not necessarily depicting any fundamental improvement in the economy. Rupee's slide was contained and Current Account deficit kept at manageable levels, which was possible mainly because of $1.5 bn grants from Saudi Arabia - the price for which remains unknown - and remittances reaching almost $13 billion in first 10 months of the outgoing fiscal. Targets were missed; the growth registered at 4.1 % was considerably lower than target of 4.4%; inflation 8.69% (though on-the-ground prices suggest it is higher) missed the target of 8%; national savings fell to 12.9% of GDP as against target of 14% and even less than last year's 13.5%; Current Account Deficit was recorded at $2.1bn as compared to $1.5 during the same period last year. The government was able to auction 3G and 4G spectrum after a long wait; and Pakistan entered the Europe bond market after almost half a decade with encouraging response - the two developments together made some more cash available for the economic managers though the latter is bound to the increase the overall debt burden on the economy. Federal Bureau of Revenue - having never been able to meet its targets - has faltered once again in the outgoing fiscal year.
Socio-economic indicators also failed to register any marked improvement. Literacy rate increased only marginally, from 58% to 60%, while per capita income in dollar terms increased by 3.5% (to $1387) that too after the decline in the value of dollar against rupee. While the official figures for poverty have not been released for some years, finance minister himself was quoted as saying recently that almost half of the country's population is living below the poverty line. Unemployment rate is just below 6% according to the Economic Survey, which, does not seem to be depicting the true picture considering the unemployment and underemployment on the ground.
This situation of the economy owes a lot to the decade-and-a-half long War on Terror, and the lingering energy crisis that has crippled the economic activities in more ways than one. Are the government figures dependable? Credibility of official data is a major question, however. It is being pointed out by certain circles that to arrive at GDP growth rate of 4.14%, the government has taken into account the Large Scale Manufacturing's (LSM) growth rate of first 9 months of the fiscal 2013-14, which was 5.3%. However, the data for the first ten months of the same fiscal indicates that LSM growth dropped to 4.7%, bringing the overall growth to below 4%, although 4% itself is very low for country such as Pakistan.
PREMISE - WHAT THE BUDGET OFFERS FOR THE ECONOMY Considering the above-stated overall picture of the economy, it becomes important to assess the overall direction of the budgetary approach of the government; as to what extent do the measures and proposals of the budget target to reduce the economic woes of the country and put the economy on a sustainable track.
Budget 2014-15 at a Glance: The total size of the budget 2014-15 is 7.9% higher than the size of budget estimates for 2013-14 with total outlay of Rs 4,302 bn and federal resource/expenditure balanced at Rs 3936 bn. Revenue estimates are estimated at Rs 2225 bn, up 16% from the budget estimates of outgoing fiscal year. Estimated external resources of Rs 869 billion are 50.7% higher than the budget estimates for 2013-14. The share of current expenditure has increased once again to 80.5%; up from the 78.8% estimated for the budget estimates of the outgoing financial year. Federal Public Sector Development Program is budgeted at Rs 525 billion, while Rs 650 of the PSDP has been allocated for the provinces. (Figures 1 gives the percentage distribution of overall allocations of the expenditure for year 2014-15.)
AN ANALYSIS OF SOME BUDGETARY MEASURES AND PROPOSALS Federal budget and the Finance Bill of every financial year contain wide ranging proposals and measures both at macro and micro levels. The following discussion presents an analysis only of some of the major announcements and measures brought forth in the budget that relate to the overall approach viz-a-viz management of the national economy and dealing with the key economic and socio-economic challenges.
Talking about the overall approach, dealing with the energy crisis becomes imminent and the foremost priority. The government has allocated Rs 200 billion in the Public Sector Development Program for the Power Sector. This indeed is a sizeable amount; and a large number of projects being undertaken with this amount can bring positive results. However, there is nothing new in the Power Sector for the fiscal year 2014-15 and an overwhelming chunk of the amount is for the ongoing projects. Only Rs 5 billion are earmarked for the new schemes of the Power Sector. Compared to it, more than 57 bn rupees have been allocated for the new sachems in the communication infrastructure - including a staggering amount of Rs 30 billion for Lahore-Karachi motorway - as part of the long-term plan of China Pakistan Economic Corridor. The point here is not to criticise the allocation for the communications' infrastructure, but the question is that of priorities: what the country's economy needs the most, motorways or energy?
Another major point to note in the overall approach is continued dependence, to a disturbing extent, on the borrowed resources. The target for domestic bank borrowing has been decreased significantly, from Rs 376 bn (RE 2013-14) to Rs 227.9 billion. This reduction is expected to positively impact inflation. However, it remains to be seen if the domestic borrowing can actually be kept to this limit because the government was able to contain it to Rs 376 billion (less than the half of target of Rs 974 bn) due to inflow of Coalition Support Fund, the Saudi support and the auction of 3G/4G. This cushion may not be available this year. Moreover, the estimate of external resources for this year is Rs 868 billion, significantly higher than 576 bn initial estimates for FY 2013-14, which actually turned out to settle at Rs 714 bn in the revised estimates for the outgoing fiscal year. This trend indicates that the actual borrowing may be higher than the present estimates. The country is already paying a very heavy price of past years' dependence on borrowed resources. Almost one third of the total national expenditure is consumed by the interest payments in addition to a small portion of the principal amount.
Dependence on borrowed resources can be reduced if the economy generates enough indigenous resources. Tax to GDP ratio, presently at around 9%, has been a major weakness. The approach for a country like Pakistan should be to enhance this ratio with burden falling more on the affluent segments of society. However, in this connection, no meaningful measure has been proposed to tax the higher incomes and wealth - be it the property transactions, gains from the fast emerging stock markets, the long-awaited agri income tax or due taxes on the luxurious lifestyles. The burden of indirect taxes on the poor segments of society is bone-breaking primarily with very high GST and a host of other taxes/duties. The budget does not bring any change in this status quo in the prevailing taxation regime. While the government's desire to document the informal economy is welcome, it needs to be realised that the real issue viz-a-viz collection of tax is corruption and lack of trust in the government and its performance. Enhanced trust in the government will certainly move more people to be part of the national development.
There are some points in the budget, which are seen as 'pro-business' and enhancing the economic activity and capital formulation. The finance minister has announced further incentives for the textile industry including reduction in the cost of capital (mark-up on export refinance from 9.4% to 7.5%), attractive rates of duty drawback, and two more years of duty-free import of textile machinery etc. It may be hoped that with these measures, the largest industrial sector of the country will start on a positive note. However, it must be highlighted here that textile is the largest export earner but industry is not all about textiles. Other major industrial sectors, by and large, have not been providing the equally encouraging or corresponding incentives. An important point in this connection is almost total neglect of the SMEs, which are considered the main instruments of enhancing economic activity and employment generation the world over.
A somewhat renewed focus on the agriculture sector, still the mainstay of the country's economy, is welcome. Incentives such as credit for the small farmers, insurance cover for crops and livestock may bring positive results. However, as any improvement in the agriculture sector is linked closely with the development of country's resources, it is rather strange to note that allocation in the federal budget for the water sector has been decreased substantially, from Rs 57 billion to Rs 43 billion.
The defence allocation - a hotly-debated subject in Pakistan - has been increased to Rs 700.0 bn (US $7 bn approx) against revised estimates of Rs 629.5bn for the outgoing financial year. It is a rise of 11.1 per cent and a net increase of Rs 70.5 bn while the ministry of defence had requested for an increase of Rs 141 billion. While it is generally argued that defence spending in Pakistan eats up the required allocations for the social sector, there in fact is no trade-off. Both are necessary in their own respective rights. Imperatives, these are. The defence spending may look higher due to small size of economy; but in the peculiar geostrategic situation that Pakistan is confronted with, it hardly meets the bare minimum requirements. India has recently jacked up its military spending by 10%, and inflation in India is around 5%. Pakistan's increase of around 11% hardly covers the inflationary impact.
As to the spending on social sectors, an important point to note is that after the 18th Amendment, now provinces are expected to allocate more resources for sectors such as education and health. They are doing so. The point here is not to absolve the federal government from its responsibility, which has increased allocation for the education sector up to Rs 24 billion. Though this allocation may not be sufficient considering the needs of society, the real issue in the federal and provincial allocations for social sector is corruption and mismanagement, which should be addressed at the earliest to improve the situation of these two sectors. Unless corruptions is checked and governance is improved, mere increased allocations would not be meaningful.
The government continues its lackluster approach of dealing with the Islamic Banking on the periphery. The constitution of a new committee for preparing recommendations aimed at enhancing the share of Islamic banks' assets in overall banking assets; and setting up of a Center of Excellence for Islamic Economics are, to say the least, too little and to late. It is also a question that what is the need for such committee and such center of excellence? The principles of Islamic banking and finance, and practices deriving out of these principles are well-established. Islamic banking and finance industry is flourishing the world over as well as in Pakistan in the light of these principles and practices. There should be no delay in turning the whole edifice of the financial industry, though under a well thought out strategy, on the principles of Islamic economics. It is specifically proposed that all new financial institutions that are being set up in the country, such as the EXIM bank should be made to work on the principles of Islamic banking and finance. Moreover, Takaful companies should be involved more in the new schemes of crops and livestock insurance to strengthen the Islamic finance industry in the country. Prime Minister's Youth Loan Scheme should also be run on the same lines.
Social Safety Nets are an important need for society like Pakistan where a sizeable chunk of the population is spending an impoverished life. The amount for Benazir Income Support Program (BISP) has been increased to Rs 118 bn from 75 bn. Per month stipend has been increased from Rs 1200 to Rs 1500. With the planned increase of 0.5 million new beneficiaries, the BISP will this year be targeting some 5.3 million households. While the increase in allocation is encouraging, this represents the old cash handouts approach instead of improving the quality of service and making people self-sustained. There are also reports that at the local level, the disbursements are plagued with political considerations. Instead of continuing this approach - involving huge sums of money with actual results yet to be known - the need is objectively analyse this program as a whole and develop some initiatives that target uplifting the standards of living and social services besides devising schemes that put the recipients on the track of self-sufficiency.
Increase in salaries (20% of the basic) and pensions is welcome; so is the raising of minimum pension to Rs 6000 from Rs 5000 made last year. However, it needs to be highlighted that while increases in pensions are made, the pensioners face a number of problems in actually getting this increase. Legal cover to ensure that such announced increases actually translate into reality should be provided. Besides the official pensions, EOBI should also increase its minimum pensions for its beneficiaries.
Will the targets be met? Considering the low level of savings and investments, growth target would be hard to meet only through the official spending on mega projects. There does not seem to be any potent approach that will help realise the ambitious revenue target. Resultantly, the bank borrowing target will have to be revised and it will impact the inflation as a spillover effect. As to the target of bringing the fiscal deficit down to 4.9% of GDP, the numbers related to fiscal deficit are dictated by and large by the IMF. The Fund was pressing for the deficit to be at 4.1% of GDP while the government was asking for 5.4%. The understanding reached was to keep it at 4.9%. The overall budgetary allocations indicate that it will be an uphill task to keep the deficit within this limit and it is bound to go to the tune of 6% of GDP. Considering that some of the amounts that were received in the form of Saudi aid and from auction of 3G/4G spectrum will not be forthcoming during fiscal year 2014-15, many of the ambitious targets would require creative thinking along with improved governance. The measures announced so far do not indicate anything substantial in this regard.
CONCLUSION Pakistan's real issue is not the lack of resources but mismanagement of resources and misplaced priorities. Having a thorough look at a year of the economic management by the present government, one finds that it is below targets set by the government itself and desired level in all the major areas of economy, not only in terms of numbers but more importantly so viz-a-viz the quality of life and social services. The promises of the budget 2014-15, particularly in terms of growth rate and inflation, depict only a modest improvement even if the targets set are achieved at 100%. As far as the prospects are concerned, there is not a single measure that can be seen as bringing any ground-breaking change and the budget, by and large, exhibits the business-as-usual approach. The statements of the senior government personalities also indicate that the people of Pakistan hardly trust the institutions and the measures taken by them. Trust is hard to restore unless some drastic measures are taken to revive the economic activity up to the desired level and to minimise the socio-economic sufferings of the people at large, while developing an overall transparent and merit-based approach in all other areas of governance. One budget indeed is not enough but one budget certainly indicates a direction, which is missing in this case.
(The views expressed and arguments articulated in this article are not necessarily those of Business Recorder)
Comments
Comments are closed.