Economic Survey launched: Finance minister hints at difficult road ahead

June 12, 2013

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The current financial year was a bad one and Finance Minister Ishaq Dar only confirmed widespread slippages on economic targets.
The current financial year was a bad one and Finance Minister Ishaq Dar only confirmed widespread slippages on economic targets.

ISLAMABAD, June 11: The current financial year was a bad one and Finance Minister Ishaq Dar only confirmed widespread slippages on economic targets.

Launching the Economic Survey of 2012-13 here on Tuesday, the minister hinted at a difficult road ahead, including a gradual increase in electricity tariff to bridge a gap of Rs6 per unit between cost and its billing and promised to eradicate Rs500 billion circular debt before June 30 or in two months at worst. “Unless we do it, reduction in loadshedding is not possible,” he said.

“The state of economy is facing severe macroeconomic challenges and will have to be brought back on the right direction through a series of policies, including structural reforms, stabilisation measures and painful actions,” Mr Dar said. These policies would be reflected in the national budget on Wednesday in light of the PML-N’s election manifesto.

He said the revival of the economy was the top priority of the new government and the next year’s growth target had been set at 4.4 per cent. “We will be more aggressive to restore investment in the infrastructure sector and hence the development programme had been pitched at Rs1.155 trillion for the next year.

Starting off with an affirmation of 80pc higher fiscal deficit than the target of 4.7pc, Senator Dar said the deficit would end up at about 8.5pc of GDP, or about Rs2trn, at the end of the year, the highest in Pakistan’s history.

He lamented that because of Pakistan’s cash accounting system even actual expenditures were not properly booked in papers and hence he would come up with a final deficit estimate in his budget speech.

The minister took full ownership of next year’s budget, saying he had been informally engaged with the central bank, the Federal Board of Revenue and the finance ministry soon after the PML-N achieved a clear majority in the general elections. He said the government would try to put as little burden on people as possible, but there was a need to cover Rs2trn deficit, which should not be higher than 4 to 4.5pc of GDP.He said the fiscal deficit would be brought down to 4.5pc of GDP in the next three years from 8.5pc this year, with a major 2 to 2.5pc of GDP of fiscal adjustment in the next fiscal year by setting difficult targets and then make every effort to achieve them. The government expenses would also be curtailed by 30pc to take the country forward, he added.

Mr Dar then listed a series of massive slippages. The GDP growth rate was targeted at 4.3pc, but estimates put it at 3.6pc of GDP. The revenue target was set at Rs2.381trn, but ‘unfortunately’ appeared facing a massive Rs350bn shortfall during the current year.

He said that since the fiscal year was to end in a couple of weeks, the achievable figures were close to reality and taken as actual. Total investment was targeted at 14.9pc, but only 14.2pc was achievable, he said.

The investment-to-GDP ratio was targeted at 13.3pc, but it stood at 12.6pc. “Without 20pc investment-to-GDP rate, the industry and economy cannot go on.”

Foreign inflows were estimated at $1.8bn, but only $800 million were realised, leaving a shortfall of $1bn.

National savings, he said, were on the higher side, standing out at 13.5pc of GDP against a target of 12.8pc.

He said the agriculture sector was estimated to grow at 4.1pc, but it grew at 3.3pc while the services sector was targeted to grow by 4.3pc, but could achieve a growth rate of 3.7pc.

He said industrial performance was the only saving grace. It grew at 2.8pc against a target of 2pc. Otherwise the overall economic growth rate may have been pathetic.

EXTERNAL FRONT AND DEBT

On balance of payments, the minister said the government had set current account deficit of $2bn, but it had turned out to be $2.9bn, while foreign exchange reserves held by the State Bank of Pakistan stood at a dismal $6.2bn.

He said the public debt, which stood at Rs3trn in June 1999, had increased to Rs13.25trn in March this year and was expected to rise to Rs14trn at the end of the financial year, which was not sustainable at all. He said the public debt stood at about Rs6.5trn in 2008 and had been built since 1947, but surged to Rs7.5trn in five years.

And these loans, unfortunately, were not utilised for capital investment but to finance the budget deficit, which was a violation of the Fiscal Responsibility and Debt Limitation Act that required public debt to remain less than 60pc of GDP, but it had grown beyond 62pc, he said.

“There was no fiscal discipline at all as the previous government continued with 25pc supplementary grants to meet expenditure through over Rs1.1trn borrowing last year.”

Mr Dar said the unemployment rate was dismal, but the previous government did not conduct labour force survey in the past two years perhaps because of political expediencies. The survey was not carried out in 2011-12 and in 2012-13 and the only results available at 6pc were those of 2010-11 survey.

“I don’t believe this. After all economic conditions have worsened in the past two years and if you add miseries of the same period, it should be on the higher side,” said the finance minister. He resolved to undertake a labour force survey in a transparent manner during the next fiscal year.

He said the energy sector was causing GDP loss of about 2pc which was not allowing the industry and commercial activities to flourish. Therefore, the prime minister has himself been supervising the finalisation of energy recovery plan. The circular debt is a serious problem which had consumed over Rs1.4trn in four years.

The finance minister said the circular debt had now crossed Rs500bn, which would be taken upfront for resolution. System losses, theft and non-recovery of dues are some of the serious challenges causing over 31pc gap.

The prime minister himself would be heading a cabinet committee on energy to end non-recovery of bills for gradual reduction in loadshedding.

In reply to a question on an expected bailout package from the International Monetary Fund, Mr Dar said there was no harm in taking new loans to pay off upcoming international liabilities, but “we will make sure that these loans do not increase in future”.