Will the budgetary measures that do not seem to be so misplaced help in pushing the economy from stability to growth, is the crucial question which even optimistic analysts might be unwilling to vouch. Reasons for such conservatism need to explored.
The federal finance minister was emphatic that the budget is investor friendly and growth oriented. No new taxes were imposed; only existing taxes were readjusted to give a Herculean boost of Rs. 60 bn to tax revenue collection. Poverty alleviation was also being adequately addressed to contain ever expanding net of poverty. He expressed confidence about the soundness of debt reduction strategy that is showing its efficacy and that the country will be soon out of IMF conditionalities.
There will be borrowing only for development and not to meet current expenditure. These are quite laudable budgetary objectives. Like the previous budgets presented by the finance minister, this budget, too, did not provide any relief for the common man.
The budget suggested relief and incentives for special stakeholders in the economy and price hike for those who should have been provided relief. This explicitly highlights weaker side of the budgetary proposals.
Efficacy and soundness of budgetary proposals can be objectively analysed by having a cursory look at the performance of outgoing fiscal year. Macro-economic indicators suggest that external sector of economy performed well, irrespective of the reasons. Forex reserves during one year have nearly doubled and are currently more than $ 6 billion, rupee appreciated by about 7 percent and remained stable and helped in inducing price stability.The reprofiling of bilateral debt of $ 12.5 billion and rescheduling of foreign debt under PRGF has reduced debt burden and provided some fiscal space for better fiscal management; remittance have more than doubled and have crossed $ 2 billion mark and finally the World Bank, the IMF and the ADB have expressed confidence in the economic policies pursued by the government so far.
Performance of external sector of economy - an outcome of multi-faceted decision made by the government after the events of 11 September, 2001 - is certainly a plus point. The pertinent point is: How is the government going to use external sector to prop up the domestic sector of economy which did not perform well as macro-economic indicators stated in the budget clearly indicated?
Weaknesses of domestic sector were conspicuous in low growth of 3.6 per cent of GDP against a target of 4 percent; tax revenue collection of around Rs400 billion - nearly equal to tax collected during FY-01 against four times revised target of Rs407 billion, fiscal deficit of 5.7 per cent against a target of 4.9 per cent of GDP and low domestic investment of Rs32.6 billion and foreign investment of $ 287 million during first 10 month of the fiscal year against a target of $500 million. Performance of other sectors of economy such as LSM, small and medium scale manufacturing (SMSM) and agriculture sector was at variance compared to macro-economic indicators of FY-01 which by itself is not an enviable reference point.
Domestic sector of economy clearly suggests that during outgoing financial year, economic policies pursued by the government did not yield the desired results. Therefore, a pertinent question arises; are the budgetary proposals sound enough to address daunting problems faced by the domestic sector of the economy? In order to answer this question, budgetary proposals made in respect of attracting investment, giving impetus to economic growth rate, collecting tax revenue of Rs. 460 bn and alleviating poverty in the country will be discussed at length. Prior to that a cursory look at the budgetary outlay is essential.
Budget estimates show total resource allocation of Rs. 761 bn. Internal resources mobilization is of Rs. 563 bn and external resources of Rs198 billion are to meet a total budgetary expenditure of Rs742 billion. Out of this, Rs608 billion would suffice to meet current expenditure and Rs134 billion have been earmarked for Public Sector Development Programme (PSDP). These figures clearly indicate that the economy is far away from the goal-post of self-reliance despite three years efforts put in by the government.
The country is short by Rs39 billion to meet current expenditure and needs another Rs134 billion to support PSDP that could give impetus to economic growth. The weaker side of economy, that is, the big gap between income and expenditure is substantial. The finance minister has tried to narrow the gap that would have been much larger than fiscal deficit of Rs162.5 billion by projecting tax revenue collection of Rs460.6 billion against initial projection for FY-02, of Rs457.7 billion and revised estimate of Rs407 billion which is unlikely to be achieved. Similarly surcharge on natural gas and petroleum has been increased from revised estimate of Rs53.9 billion to Rs60.5 billion and non-tax revenue has been increased from initial budget estimate (FY-02) of Rs139.1 to Rs153.8 billion. The gap between the income and expenditure should have been bridged by generating more revenue preferably through taxing affluent classes directly without overtaxing the poor segments of the society. The budget proposals have, however, shown a visible lack of understanding of the plight of the poor. Edibles items like ghee have been taxed to generate Rs. 4 bn and have been promised relief by controlling inflation.
Main consumer of expenditure is debt servicing. It is down by Rs30.4 from last year’s (FY-02) debt servicing of Rs320.1 billion to Rs289.7 billion. Almost 97 per cent relief is because of reduction is interest on foreign debt (Rs7.7 billion) and payment of foreign loans (Rs22 billion). Interest on domestic debt has not budged; it has only reduced nominally from Rs192.5 billion to Rs191.8 billion - a decrease of Rs0.7 billion.
These statistics indicate that whereas the state of Pakistan has benefited from the government’s decision to join anti-terrorism war led by the US through re-profiling of bilateral foreign debt of $12.5 billion, debt rescheduling under PRGF, domestic debt that is around 54 per cent of GDP is the real drain on financial resources available to the government for fiscal management. Government is not fully conscious about it as the budget estimates show a borrowing of Rs62 billion against projected borrowing of Rs10.5 billion for the outgoing financial year. For the FY-03, domestic debt payment of Rs31.1 billion is indicated. It will be a step in the right direction in case by the end of next fiscal year this figure turns out to be true. The need to curtail domestic borrowing is but obvious and cannot be over emphasised.
The finance minister did not mince any word to be emphatic that national defence is number one priority when it comes to allocating financial resources. He was quite articulate and understandable. But, there is other side of the story as well. Before that is stated, a cursory look at the defence expenditure is essential to put our record straight. For the outgoing FY, defence allocation was Rs131.6 billion. Previous to it Rs28 billion against pensions paid from defence budget were transferred to civil administration which had shot up to around Rs80 billion. This time pension head appears separate in budget estimates. Read with the figure of Rs28 billion, defence allocation would have been Rs160 billion for FY-02. Nevertheless going along with the figures reflected in the budget estimates, the defence budget during FY-02 was increased because of security imperative from Rs131.6 billion to Rs151.7 billion - an increase of Rs20 billion or 15 per cent. Defence expenditure for the FY-03 has been decreased from actual expenditure of Rs151.6 billion to 146.0 billion because of financial constraints and the expectation that de-escalation will take place.
One hopes that on-going stand-off between India and Pakistan will come to an end as early as possible. The two countries where nearly 40 percent of world poor people live earning less than one US dollar per day, need to defuse tension as early as possible is but obvious.
The budgetary proposals clearly indicate that the government intends consolidating investment-friendly reforms that have been pursued thus far. Tariff has been reduced to bare minimum of 25 per cent with four slabs to make raw material cheaper to reduce the cost of inputs to make production of goods competitive in domestic and international market, corporate and personal income tax regimes have been rationalised and discretionary powers of income tax officials have been minimised.
The budgetary proposals suggest that a sort of revolution in tax collection regime would in the offing because of execution of universal self-assessment system from the fiscal year 2002 under Income Tax Ordinance 2002. According to Ordinance only 20 per cent self-assessments will be subject to audit. Information Technology will be put into maximum use to reduce discretionary powers of ITO. Other tax related irritants would also be addressed. These measures should ease problems of investors who believe that it is irritating and expensive to do business in Pakistan. Will the government succeed to collect Rs460 billion - an ambitious target by any stretched of imagination - through the budgetary proposals? It is doubtful.
It is to be appreciated that whereas consistent economic policies, investor-friendly business rules and tax regime do attract investment and build investors’ confidence to invest more, good law and order situation, productive labour force, a well developed human resource and a deep rooted culture of good economic and political governance are equally important, rather more important to attract investment. The present team of economic managers do not have much to show as far as good economic governance is concerned as was highlighted in some of the pre-budget seminars by the investors across the country. Also, the on-going tension and stand-off with India, political division and polarisation in the country, uncertain outcome of the forthcoming general elections and thereafter - all these factors are unlikely to make Pakistan an attractive place for investment by the foreigners or even by the domestic investors who are cautious to risk their capital.
Budgetary target for economic growth is 4.5 per cent of GDP. Under the existing economic environment where investment is stagnant and is unlikely to pick up and government is short on generating its own funds to support a modest allocation of Rs134 billion for PSDP that is less than Rs4 billion allocated for the outgoing fiscal year but more by Rs9 billion than Rs125 billion actually spent during the outgoing fiscal year, economic growth rate target is no less than ambitious. The budget makers have pinned hopes on some of their budgetary proposals that might give impetus to growth of LSM and SMSM.
Agriculture sector except for mega projects has not been given due attention. In case that happened both formal and informal sectors would benefit. The above stated growth rate target will be in reach, in case agriculture sector also picked up from paltry growth rate of 1.4 per cent. Hopefully, world economy will register positive trend in its growth rate and unit value of Pakistan traditional exports particularly of cotton origin will not be under valued as has happened during past two years. Also, an appreciated rupee will not impede exports which are essential to give impetus to growth. Will a happy blend of investment and exports come into play to achieve targeted growth rate of 4.5 per cent of GDP that is essential to provide employment - one of key instruments to alleviate poverty is a crucial point to be watched carefully.
