The Budget

THE federal budget for 2002-03 makes one distinct departure from the annual ritual of past years by proposing a significant reduction in the current expenditure, mainly in the allocation for debt servicing. But the savings from the overall reduction amounting to over Rs. 40 billion have not been allowed to be diverted to the development budget which has been suffering significant cuts year after year for many decades now. This was mainly due to ever increasing non-development expenditures. Despite the space provided by the reduction in the current budget by a whopping six per cent, the allocation for development continues to remain at the abysmally low level of 18 per cent of the total outlay. This brings us to another landmark point of the new budget estimates. Perhaps for the first time in Pakistan’s history these have been kept at a level lower than in the previous year and that too by a hefty four per cent. This is the reason why perhaps there was not enough room for increasing the development budget as substantially as one would have expected.

But, then, why does a government which has garnered large savings from the non-development budget find it necessary to curtail the overall expenditure so massively compared to its revised outlay for the previous year? Perhaps the failure of the CBR to collect even Rs. 400 billion against the budgeted revenue estimate of Rs. 457 billion for the outgoing year is the reason for the budget-makers unwillingness to project an additional revenue income of more than Rs 60 billion for the next year, making a larger allocations for development possible. In fact, the collection of an estimated Rs. 400 billion during 2001-02 matches that of 2000-01 almost to a rupee. Even in 2000-01 the collection came up to nearly Rs. 400 billion, only because of a number of one-off measures such as a crackdown on smuggling, surveys for documentation and a one-time whitening facility, etc. So, despite all the reforms that this government has been introducing over the last three years and its so-called good governance, the revenue generating capacity of the economy has continued to stagnate. The principal reason for this has been the slow-down in investment activity in the country. As in the past two years, the budget-makers have announced a number of investment incentives for the next year as well. On the face of it, all these appear sound and timely. The decision to put greater reliance on income and sales taxes by rationalizing them, by reducing their rates and by withdrawing as many exemptions as possible is welcome. It is also easy to see the economic logic of reducing the highest customs slab to 25 per cent. But the question is, would these reforms improve the climate for investment in the presence, say, of negative sentiments and the absence of any significant public spending on infrastructure? The events of September 11 and December 13 as well as the drought have impacted adversely on the investment climate.

The aftermath of these happenings is likely to continue for some more time, making it difficult for Pakistan to break out of the resulting recessionary bout and revive the economy. Until that happens revenue incomes would continue to remain sluggish, forcing Pakistan to keep its public spending on a tight leash. But do we have the time to wait for these adverse factors to disappear, allowing the right investment climate to emerge? The chances are that if Pakistan fails to reverse the economic recession within the next two years, it would be facing the ignominy of a debt default once again. What is more, the very fiscal space that has enabled it to reduce debt servicing this year is the direct result of the concessions granted by the multilateral and bilateral donors in return for accepting certain fiscal reforms prescribed by them. The most important of these is the prescription that Pakistan strictly adhere to the target of budgetary deficit fixed by these donors. Failure to stick to this reform would lead immediately to the withdrawl of the concessions on the external front, including debt servicing.

On the other hand, resort to deficit financing in some measure is absolutely vital to expand the scope of development activity and halt the recession. This is contrary to the donors’ prescription. As it is, in the outgoing year the overall fiscal deficit (OFD) was fixed at 4.9 per cent of GDP, but perhaps because of higher defence needs it had to be pushed up to seven per cent. The next year’s target for OFD also appears highly unrealistic at four per cent. This is bound to be exceeded. So, instead of forcing the country to adhere to such unachievable OFD targets and then allowing it waivers after it has crossed the limits because of an increase in its current expenditure or a reduction in its revenue income, the multilateral donors world do well to allow room for at least a half per cent increase in the OFD for development needs only. This would allow the space needed to take in hand badly needed physical infrastructure projects which in turn is bound to induce private investors to come out of their hibernation and play their role in expanding economic activity.

Wider access to Internet

A rise by over 30 per cent in the number of Internet users in the past year reflects the growing interest in information technology in the country. The increase - from 1.3 million to 1.7 million users - is particularly encouraging because it allows a greater proportion of the population access to a cheap and very quick way of communicating with the rest of the world. Other than that, the Internet is literally an infinite source of information and knowledge and because of that can be very empowering for users. This particular benefit is especially important in Pakistan where wider access to education, knowledge and information is vital for progress.

No doubt, all this growth would not have been possible without the decision of the ministry of science and technology to extend Internet coverage to several hundred towns and cities. The policy of promoting information technology and Internet use has contributed to a rapid growth in this field. However, it needs to be pointed out that an increase in the number of net users has not meant a corresponding increase in the quality of service provided by the Internet companies. besides, many Internet service providers (ISPs) have not passed on to consumers the benefit - in the form of lower prices - of reduced government rates for purchasing bandwidth.

This commendable policy measure, designed to lower the costs of the ISPs and hence that of the end user, has meant increasing the industry’s profit margins. In fact, many ISPs have been rightly criticized for taking on far too many users given their capacity - a practice that has slowed the download speed for users. The ministry of science and technology should see to it that growth in the number of Internet users does not happen at the expense of the quality of the services provided.