President Musharraf kicked off the budget season by announcing earlier this month that the revenue collection target for the next year should be Rs1 trillion and that the aim for next 10 years is to cross the mark of Rs4 trillion.
He did admit that the tax-to-GDP ratio was low but hoped that current year’s target of Rs835 billion surpass the Rs900 billion mark.
The president said that the Public Sector Development Programme (PSDP) had gone up to Rs415 billion last year from a mere Rs70 billion indicating perhaps that next year the PSDP would perhaps be more than the Rs500 billion.
Earlier, in April, Prime Minister Shaukat Aziz claimed that Pakistan's per capita income will cross $1000 next year. It was $847 last year, and is expected to be around $950 this year. According to his estimate, nearly 13 million people have been lifted out of poverty, out of which almost 11 million belong to rural areas.
However, it would not be out of place here in this budget season to have a look at the flip side of the coin as well in order to test the above claims and optimistic assertions for the benefit of the authors of the next year’s budget.
The rural poor: According to a latest World Bank report released in early April unequal distribution of land and access to water for the rural poor limit the scope for agricultural growth alone to rapidly reduce poverty in rural Pakistan. Around 35 million people in rural areas remain poor, representing about 80 per cent of the poor.
The report says, Pakistan’s rural non-farm sector faces numerous constraints, particularly related to access to credit and inadequate infrastructure. According to the 2000 Agricultural Census, only 37 per cent of rural households owned land, and 61 per cent of these land-owning households owned less than five acres. Access to usable water is also unbalanced. Because of this skewed distribution of ownership and access to productive assets, much of the direct gains in income from crop production, particularly irrigated agriculture, accrue to higher income farmers.
In most of rural Pakistan, the impact of agricultural growth on rural poverty is limited for two reasons. First, much of the gains in rural incomes are spent on urban goods and services. Second, growth-linkage gains to non-agricultural incomes and employment in rural areas are shared among a large number of rural poor.
The report says that a major reason for the limited impact of rural development efforts is a lack of participation and influence of rural poor households. This limits effective demand for public services and reduces the efficiency in development programmes. Although inclusive economic growth should be the main mechanism for reducing poverty, increased social protection efforts are needed to protect the most vulnerable.
The benefits of broad economic growth trickle down very slowly when the poor have little access to key physical, social, and financial endowments. To overcome highly unequal distribution of these endowments and achieve rapid pro-poor growth, poor people need new opportunities to organise, to generate business, and to link with mainstream development activities.
The real economy: And in order to understand what is happening on the front of the real economy as opposed to the one which is shaping into a bubble one needs to go through an internal report of an international investment bank in early March.
The recent upsurge in FDI, according to this report, is comprised mainly of merger and acquisition (M&A) activity in the financial, telecom, and consumer (FMCG) sector. However, in the longer term prospects it would be unlikely for the current quantum of M&A-driven inflows to be sustained. In one or two cases, the gross inflow is likely to be soon followed by lumpy outflows, as offshore entities repatriate their share of profit/capital as major share holders.
Another important contributor to the recent accretion in foreign exchange as been a sharp increase in portfolio inflows ($557 million between July 2005 to end-February 2007, according to SBP data). The rising stock of portfolio investment is potentially adding to the vulnerability of the external account, by exposing it to “sudden stops”. Portfolio flows can be capricious, as painfully underscored by the price action in global equity markets over the past month.
In the longer run, the fact that FDI inflows are concentrated in the services sector-as opposed to manufacturing –poses a challenge. Unlike FDI in the export sector, which can be expected to generate a stream of foreign exchange inflows over the life of the project, foreign investment in non-tradable services generally produces a one-time inflow, followed by steady outflows on account of profit/capital repatriation.
The report said that with the rise in privatisation-related inflows as well as cross-border M&A activity, foreign exchange payment liabilities to foreigners are being created. Under the base case forecast for the external account, we expect profit repatriation by foreign-invested enterprises (FIEs) to increase from $443 million in FY06 (actual) to over $1.1 billion in FY8, and to approximately $1.5 billion by FY10.
” Finally, two potential sources of payment stress in the 1-2 year horizon that need to be factored in include the resumption of servicing of debt rescheduled under Paris Club-III (an incremental $430 million in FY08), and the scheduled end in 2008 of safeguards against Chinese textile and apparel imports imposed by the US and EU. The latter development could pose a further challenge for Pakistan's textile and clothing exports,” said the report.
The bubble: So, the economy is growing at the rate 6.5-7 per cent and the per capita is increasing so robustly actually on the flows of foreign aid, mergers and acquisitions, remittances, telephony, real estate and the stock market. Nothing is happening on the front of real economy except capacity production of white goods and four and two wheelers which are being sold to mostly lower-middle income group consumers on costly credit whose ability to repay is highly doubtful threatening them with bankruptcy all the time.
And at the same time, both budgetary deficit and current account deficit are expanding at unsustainable rates. Investment rates are stagnating at around 16 per cent while exports have been hovering around 11-12 per cent of the GDP for the last five years. And the export economy is still dependent on just one item—textile. This is the reason why the foreign exchange reserves have fallen to the level of four months of import bill. And very soon, they are going to go further down and rapidly as expanding dividends and profits start getting repatriated by those who have set up mobile telephony and banks and bought financial institutions and the rescheduling bonanza comes to an end.
Meanwhile, the power and water shortages are going to start impacting adversely more seriously both on our agricultural production and industrial potential.
The military-led government has been promising the nation scores of mega water, power and other infrastructure projects since it took over some seven years ago. But so far neither has it been able to add one single megawatt of electricity to the already existing capacity, nor has it resolved the looming water crisis. So, in the years ahead the import bill is expected to go up steeply as more and more oil and gas will needed to be imported to power the wheels of industry and pump out water for irrigation which are threatened with shut down as supplies of both water and power outstrip even the existing demand.
