Funding the budget: need to raise the required domestic resources

This write-up intends to analyse the budget for 2007-08 [FY-08] under various dimensions; firstly the priorities of the economic managers since October, 1999 take-over, secondly the challenges ahead and the measures to tackle them and thirdly the source of funding the governmental expenditure and whether there has been any material departure from the past policies.
Since much earlier than October, 1999 the country had been facing the brunt of the shortage of energy, both gas and electricity. Government's first priority should have been to attend to this issue first. Nothing tangible took place in this field. Not a single megawatt could be added to the electric generation capacity during the last 8 years.
The proposal envisaging import of gas from Turkmenistan through Afghanistan will remain a pipe dream for quite some time because of the environments prevailing in Afghanistan. Much talked of import of gas from Qatar is no more in the news. The proposal of laying of Iran-Pakistan-India (IPI) gas pipeline does not get finalised despite continued negotiations between the three countries for over two years. The American policy about this pipeline is perhaps proving an impediment.
In view of the feasibility of import of gas in the near future being in doldrums - as was visible during the past 8 years - the economic managers should have ventured for installation of hydel/thermal power plants.
But the economic managers' priorities stood elsewhere in selling the national assets to the foreign buyers, bringing investment in sectors like telecommunication, and gearing up auto sector [based on bank credit] etc to increase the GDP with a view to demonstrating on the basis of autos and cell phones that they have made the nation prosperous. Here too, the priority has been misplaced. Instead of establishing factories for manufacture of cell phones in Pakistan-with foreign technology, if required, the economic managers have left the nation on perpetual import-which could have obviously been avoided.
Although there has been a lot of talk about construction of mega dams, the only progress since 1999 is the foundation laying ceremony of the Basha-Diamer dam early this year. The allocation of a meager sum of Rs 500 million in FY-08 budget indicates that actual construction will not commence during FY-08.
The other mega hydel power project hanging over for many years is Neelum-Jhelum project in Azad Kashmir. In FY-08 budget speech, the Minister of State for Finance stated that government is constructing this project costing Rs 84.5 billion. On completion, the project is to generate 969 megawatts of energy. The Minister did not mention about the allocation made in the budget for the project.
However, the media reports put it at Rs 10 billion. This means that full-fledged work on the project is unlikely to begin during FY-08. The work on the project was scheduled to commence in 2002. It is perhaps the government's inability to raise external resources so far for the project that a beginning could not be made. The cost of the project in US$ terms will be approximately 1.5 billion and naturally the entire amount will not be required in one year.
The gestation time will not be less than 3 years and thus annual expenditure will be around $500 million. Keeping in view the year-by-year growing budgetary outlay and the foreign exchange reserves touching $15 billion level, it may not be difficult to fund the whole project from the country's own resources instead of wasting some more years in lining up external resources. Could we expect that from the economic managers? After all we are financing ever growing imports. So why not this vital project of national importance?
This is all the more necessary because the electricity crisis in the country - more particularly in Karachi - is worsening day by day. The media reports suggest that an agreement has been reached between the government and one of the co-owners of KESC for erection of coal-fired project of 1000 megawatts capacity. When the owners of KESC have miserably failed in running the already established power houses of 1200 megawatts, how can they be expected to bring in the fresh project. The Government should preferably find out some alternatives expeditiously instead of relying on the fractional owner of KESC.
CHALLENGES AHEAD:
The most severe challenges which the country's economy is facing today are in the shape of trade and current account deficits. The economic managers as well as the business community, instead of taking measures to diversify/increase exports to cover these deficits, are content that these deficits are being financed through workers' remittances and the Foreign Direct Investment (FDI) including sale proceeds of the national silver.
The economic managers have failed to bring FDI in the export-oriented/import-substitution manufacturing sector or the export-oriented Information Technology sectors which could assist in bridging the current account imbalance. The existing policy may in the near future make the balance of payments unmanageable and hence needs to be reviewed.
There is also a need for devising means to curtail imports as far as possible. The value of import of fuel oil may reach $7 billion by the close of the fiscal FY-07. This bill needs to be cut. Uptill now, there seems to be no thinking in the government circles to this end. For that there is no short cut solution. The Government should plan efficient and economic mass transit system in the big cities so that the public could travel by that system instead of using cars and motorcycles.
This would substantially cut the oil import bill; though it will reduce the chances of demonstrating public prosperity based on two/four wheelers and cell phones. There had been a lot of talk over the last 15 years for construction of Sohrab Goth - Tower mini rail corridor and other such corridors but things could not come out of the files. The closed Karachi circular Railway could not be revived while plying of local trains between Karachi city - Landhi-Pipri commenced two years (or so) back has also been closed. Will the authorities look into these public convenience/import cutting measures?
SOURCE OF FUNDING THE GOVERNMENTAL EXPENDITURE:
The governmental expenditure is financed through taxation, domestic and external borrowings. Let us have a brief look on the revised estimates of the fiscal 2006-07. Almost every year, a portion of the development expenditure remains unutilised. The revised amount of the development expenditure is Rs 394.5 billion (original amount was Rs 435 billion). This huge cut of Rs 39.5 billion could be utilised to reduce the fiscal deficit by about 0.46 percent. But it appears that the cut has been absorbed to finance the growing non-development expenditure.
There has been a lot of talk during the last few years about breaking up of the begging bowl. But dependence on borrowing for financing a part of the budget is on the rise. As against the bank borrowing [domestic] figure of Rs 55.2 billion [Revised estimates FY-07], the estimated amount for FY-08 is Rs 130.9 billion [137.13 percent higher]. Apart from that privatisation proceeds amounting to Rs 75 billion will also be used for financing budget deficit.
The external resources will contribute Rs 258.5 billion [=$4.27 billion @ $1=Rs 60.50] mostly to be funded by the multilaterals like World Bank / Asian Development Bank etc out of which only Rs 66.5 billion [slightly over $1 billion] will be spent on development as these loans will be project related while the huge sum of Rs 125.8 billion [over $2 billion] will comprise programme loans from the multilaterals and will obviously be used for financing current expenditure. The aforesaid figure of Rs 258.5 billion includes Rs 31.1 billion [slight above half a billion dollars] to be raised through Euro-bonds.
What are the "Programme Loans"? These loans are disbursed in cash by the multilaterals against past imports of the specified goods from the specified countries.
The Government then utilises these funds on its day to day expenditure. Such is the crunch that we are borrowing externally against the past imports. This has been the policy spread over 21/2 decades or so and the proponents of "breaking of the begging bowl" could not bring any material change in it. Why this occurs with consistency?
The simple answer is the inability of the economic managers to raise the required domestic resources to fund the budget which compels them to tie up the economy with the external borrowing. One sees that the estimated tax-collection/GDP ratio for FY-08 is around 10 percent depicting the status quo.
The raising of external resources for funding the projects - and specially the foreign exchange cost - can be justified to some extent but to fall back upon the external borrowing for funding the current expenditure for the reason that the economic managers' helplessness before the influential lobbies does not permit them to raise the adequate domestic resources is of course not the sign of "breaking the begging bowl" as is claimed.