KARACHI, June 10: This year’s budget is populist in tone, inflationary in substance, neutral for the agriculture sector, pro-corporate in general, disappointing for the textile industry and largely irrelevant for the common person, although it offers some relief to government employees.

While there has been no significant policy change, it is an attempt to address two of the most pressing near-term issues.

Faced with a record trade deficit and double-digit food price inflation, the government has been forced to levy a special surcharge of 1 per cent on all imports excluding vegetables/pulses, edible oil/ghee, petroleum products, medicines and fertilisers.

This small levy is unlikely to make a dent in the import bill and hence in the trade deficit. The reduction in the prices of essential items at the utility stores and expansion in their network was announced last year as well but failed to control the food price inflation. This is a cosmetic measure for public consumption rather than a serious effort to address the real supply side issues.

The government can draw satisfaction from a 7 per cent GDP growth, record level of foreign investment, good wheat production, record tax collections and a booming banking sector that has fuelled a consumer boom. The tax collections grew by 18 per cent — Rs840 billion and the next year’s target of Rs1030 billion is ambitious given no new taxes have been announced. The growth in taxes has been concentrated in a few sectors and withholding taxes.

The government continues to define all withholding taxes on utility bills, contracts, bank transactions, etc. as direct taxes but the reality is that the withholding taxes together with the direct taxes still account for three-fourths of the total tax revenues and have contributed to inflation.

The budget has not made any attempt to remove the distortions that have been the subject of public debate in recent months. Perhaps, it is a little too much to expect a government to take concrete measures to expand the tax net to large landowners, big industrialists and stockbrokers in an election year.

However, the budget speech was perhaps more important in respect of the issues that it did not address. While the growth has been impressive, it has come at a time of unprecedented growth in the global economy and abundant liquidity.

Pakistan’s total banking deposits (of individuals and private businesses) grew by almost $20.3 billion during 2001-2006 and were driven by an equal volume of remittances. The demand-driven growth has obscured the fact that the growth of major crops, that is cotton, wheat and rice, has averaged 2.1, 1.6 and 0.8 per cent per annum respectively during the past seven years while the population growth has average more than 2 per cent.

The inadequate growth rate in the agricultural crops lies at the heart of persistently high food price inflation. Subsidies and credit without massive investments in water, energy and human resources have proved to be inadequate to grow crops at the required rate.

The government has responded to this criticism by pointing to the record size of the Public Sector Development Programme (PSDP). Last year’s budget was Rs435 billion but the revised estimates point to only Rs395 billion. This year’s budget of Rs520 billion includes higher allocations for water and power but no significant allocation for higher education that remains a tiny 6.5 per cent of the defence budget of Rs275 billion.

It is alleged that this amount does not reflect the true level of defence spending because it does not include about Rs60 billion received from the Pentagon for the logistic support and about Rs40 billion spent on the pensions. If these estimates are correct, the actual level of defence spending may be close to 4 per cent of the GDP and not 3 per cent as claimed. Even if it is Rs275 billion, it is four times more than the combined allocation for water, electricity, higher education and motor highway construction in the current budget. While a lot has been written about the lack of investment in the power generation sector in the past years, another important fact is rarely mentioned. Overall water availability has remained constant around 134 million acre feet for the rural areas in the last seven years and is a major impediment to the growth of agriculture.

The total budget deficit of Rs395 billion will represent about 4 per cent of the GDP compared to last year’s 3.7 per cent. The tax revenues have increased in absolute terms but they still represent 9.5 per cent of the GDP compared to over 12 per cent ten years back. The government needs to cut the deficit to control its borrowings that have contributed to a reduced availability of credit to the private sector as well as to high interest rates. Therefore, an interest rate cut by the State Bank seems unlikely in the next 12 months. This is not a good prospect for the exporters who are already facing stiff competition from China and India.

The exports have grown by only 3.3 per cent this year and the current deficit has swelled to 5 per cent of the GDP. While the government maintains that financing this is not an issue and points to $4.2 billion in FDI, it will be a challenge to maintain this level given the political situation. These investments were concentrated in 5-6 companies and the current account, foreign exchange reserves and the rupee can come under pressure if these FDI levels drop. The government should cut non-essential imports sharply as the oil bill accounts for only 22 per cent and only $3 billion has been spent on the import of industrial machinery out of a total of $25 billion so far in the current fiscal year.

It appears that in its last budget, the current administration has chosen not to take difficult decisions regarding increasing the tax base and cuts in non-development expenditure because it would rather leave it for the next government to make tough policy choices when the crunch comes.