THE next federal budget is likely to propose measures aimed at further fine tuning the monetary and fiscal policies to sustain the high growth trajectory while at the same time keeping the inflationary fires well under control.
It is also likely to propose juxtaposing these measures in order to rationalize the expanding deficits in trade and current account while at the same time keeping flows of industrial input imports unhindered and the revenue incomes increasing.
Finally, since the next general election according to an announcement made recently by the President himself is about two budgets away from today and since both the President and the ruling coalition seem to have already started their poll campaign, there is this further pressure on the policy makers of the incoming budget as well as the one that would be announced in June next year to play to the gallery as well.
They have to come up with measures that would continue to feed the facade of ‘Pakistan shinning’ while at the same time allow the rich who have completely taken over the economic policy making and implementation processes and corporatised the entire economic activity, to continue to fill their coffers at the cost of the poor masses. But then they would need a magic wand to accomplish these inherently ambitious goals because very little attention has been paid to the problems that confront our real economy.
Savings and investment: The foreign-aided boom seems to be tapering off. The official economic managers take a lot of pride in what they call the on- going economic reform and structural adjustment process and to which they attribute all the positive economic indicators achieved in recent years, like the all round higher growth rates, the dramatic increases in revenue collection and exports.
But what they have so far failed to explain is why all these reforms and adjustments have not been able to improve our savings and investment rates and the rate of our incremental capital out- put ratio (ICOR).
The domestic saving rates continue to stagnate at around 13-14 per cent of the GDP on an annual average and the rates of investment have not gone beyond 15-16 per cent, on annual average, during the last seven years. The ICOR has remained between 4-5 all these years.
This is amazing because countries like China and India with each having almost ten times the population of Pakistan and where reforms are still in an infancy stage have a lot better record on this front. China saves almost 50 per cent of its GDP and then invests almost as much annually. In the case of India, these rates are also on the higher side of 25 per cent.
And their ICORs too have improved dramatically. So, for Pakistan to achieve a sustained growth rate of over eight per cent, it needs to target an investment rate of over 30 per cent of the GDP annually over the next 15 years and a savings rate of nearly as much otherwise, the gap between the savings and investment rate would have to be filled with costly loans as foreign private investment appears to be still very shy in the case of Pakistan.
Revenues: The high rate of increases in revenue collection in recent years is attributable to the price driven incomes from the petroleum and gas development surcharges and customs duties.
The other chunk in the quantum jump in the collection comes from the coercive system of withholding tax (mostly under the head of sales tax). And while all the indirect taxes whose rates and incidence keep on jumping, have been allowed to impact severely on the poor despite all the reforms, no attempt has so far been made by the CBR either to expand the tax base or the income tax net. It has not even succeeded in persuading the rich to declare correct amounts of their incomes.
If one goes through the list of various categories of income tax payers, he will be shocked to know that the richest earn no more Rs.25,000 per month!
This incongruity is evidenced by the sale last month of over 40 pieces of German sports car costing an average of Rs6 million a piece. And a couple of our rich have also brought Porsche Cayman S for over Rs10 million a piece.
During this very month, the efficient economic managers pushed an essential food item like sugar out of the reach of the poor by letting the so-called ‘market forces’ to escalate the prices of this commodity beyond Rs40 per kilo. But in the process it has also allowed the mill owners, many of whom sit in the cabinet making economic policies to pocket billions of unearned incomes, which will not come under the purview of taxable income.
Poverty: During the last drought cycle and when the government was still focusing on reducing the budgetary deficit by tightening the leash on expenditure under pressure from the IMF, almost 35 per cent of the population had fallen below the poverty line.
In the interim period following the injection of massive concessional assistance from outside, there has been a statistical improvement of five per cent or so in the situation. Still the level of poverty continues to hover around 30 per cent and not 25 per cent as has been claimed by the government in recent weeks.
The reason for this discrepancy is the government’s own attempts at fudging the poverty figures. It had used a figure of 32 per cent for the base year (2001) instead of the actual 35 per cent and now therefore it is forced to come up with an unrealistic figure of 25 per cent.
An exaggerated estimate of livestock population has also been used by this government year after year to window dress its overall growth figures, which it is likely to repeat again this year as the agriculture sector is likely to show a growth rate of no more than zero per cent.
Poverty has been variously defined. But those who do not have any landed asset, lack education (knowledge) and no access to the other assets do remain perpetually poor. In Pakistan, at least about 80 per cent of the population falls into this category.
So, no matter what you do to lessen poverty, you simply cannot succeed if you do not do realistic land reforms, promote the culture of lawful housing mortgage system, provide universal primary education to your population and disarm the warlords.
Pakistan spends far less than its South Asian neighbours on education do. Its annual education budget is only 2.3 per cent of the GDP while most low income countries spend on an average about 3.4 per cent.
The budgets for education and other social sectors has not only remained abysmally low all these years, but the rate of budgetary releases by the finance ministry to the relevant agencies of these sectors too has been very slow. The rate of utilisation by these agencies too has been too laggard.
Casino culture: If you are not saving and investing enough and if your incremental capital output ratio has also not improved and your real income from revenues is stagnating then how is it that you have continued to show very high growth rates in recent years? The answer is simple. All the existing productive capacities have been used in this period helped mostly by the financial space created by the bounties of 9/11 and the surplus output has been consumed by the expanded market space made available in the rich markets because of the same reason.
One would have thought that the fiscal space which was made available to the present government and the expanded markets given to our exporters during this period would have been utilized sensibly by the official economic managers to present budgets aimed at expanding the real economy and its ability to generate increased savings to not only accelerate investment but also reduce dependence on foreign assistance. This seems to have not happened. Instead, the successive budgets have encouraged the casino culture.
Stock and land prices have been skyrocketing adding artificial wealth to the GDP and allowing the casino owners—the stock brokers—to make a killing both when there is a bull run or when the bears take over the market.
In the last seven years these brokers have floated their own investment banks and have also gone and purchased state-owned enterprises. The element of conflict of interest in this does not appear to bother the official economic managers.
Privatisation: The shortfall in income against expenditure is now being attempted to be covered by selling the family silver. Here the term family silver is being used for those enterprises which were originally floated by the state itself and not nationlised units.
Take for instance, the privatization of the PTCL. This utility has been sold by one government to another (as the Etisalat is owned by the UAE government and the process is called privatisation.
The Steel Mills, the mother of all the industries has been sold to a consortium in which the major share- holders are foreigners and the Pakistani shareholder is a stockbroker.
The majority shareholder among the new owners of KESC is a foreigner. Two of the major banks, the UBL and the HBL have been sold, again to foreigners. This amounts to undermining Pakistan’s economic sovereignty itself and making the country’s economy vulnerable to the whims of the foreign investors.
Not only this, the government’s policy of privatisation and selling off its family silver without first putting proper regulatory bodies in place has encouraged emergence of cartels (sugar, cement etc.) pushing up the prices and adding an unnecessary and uncalled for component to the rate of inflation.
The liberalisation of oil market without subjecting it to a regulatory system has also given rise to an oil cartel, which alleged to have pocketed Rs4.5 billion of unearned profit in the last couple of years.
Trade and current account deficits: And there is also the challenge of expanding trade and current account deficit which the budget makers will be facing this year. The exporters have made the most of the all the market access that we have so far received from the rich countries by way of a pay-off for joining them in the war against terror. And in the process, they have also exhausted all the idle manufacturing capacity. Now, in order to increase exports further, they would need to install new capacities and also find new markets.
But there is no sign of such a thing happening. And the expanding trade gap is being presently attempted to be covered by the using the $5 billion or so annual flows of remittances and the proceeds from privatisation. And what would happen once all the family silver is sold?
Luxury imports: There is certainly a lot of room to bring imports under control. But the appetite of the rich for expensive consumerism seems to have become inexhaustible and since they belong to the ruling elite who make economic policies, there is hardly any possibility of curbing expensive imports, especially of costly cars and fancy cell phones.
Shockingly, a number of plans are on anvil to ‘set up’ manufacturing units of new models of cars like Renault, Chrysler Daimler and Black Cabs etc.
But all of these brands are likely to be imported in assembled form or knocked down condition (CKDs of any model can be assembled in the available facilities that can be rented at economic rates) for at least three years on the plea that it would take as many years to put up a requisite plant.
And for setting up these plants, the well-connected sponsors are being allotted huge plots of land (at least about ten times more in size than the actual requirement) at throwaway prices. This is called foreign investment.
Foreign investment: So far, not a single penny has been received by way of foreign investment which, could help add to our export capacity. The government seems all set to sign a Bilateral Investment Treaty with the US hoping that the American private investor would bring in billions once such a treaty is signed. This is highly doubtful. But even if they do bring in some millions, the attached conditions would perhaps be too costly.
According to one of the conditions under these terms if an investment fails because of the failure to do business with the local private sector partner or the under the rules and laws of the land, the government of Pakistan would be required to pay to the foreign investor for the loss of potential profits! So look before you leap.
THE next federal budget is likely to propose measures aimed at further fine tuning the monetary and fiscal policies to sustain the high growth trajectory while at the same time keeping the inflationary fires well under control.
