A stabilisation budget

June 09, 2014

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THIS year’s budget is the second under the stabilisation programme. In the first year, the government tried to reduce the fiscal deficit to 5.9pc of GDP by increasing non-tax revenues and capital receipts, reducing the development expenditure, imposing provincial surpluses and leaving the circular debt at around Rs300 billion.

The contours of the second year’s budget are almost similar to the first one, since it furthers the stabilisation programme.

Normally, the stabilisation package shifts the focus of the government to savings by following tight fiscal and monetary policies. The package is meant to reduce the fiscal deficit by increasing taxation and curtailing expenditure to restore macroeconomic stability.

In FY2014-15, the government intends to tighten the fiscal and monetary policies. This combination of policies is followed when the economy is overheating. However, the Pakistani economy is in an early recovery phase, and this tight stance may sap the growth.


Fiscal discipline will be imposed on the provinces through at-source deductions while net expected provincial surplus is estimated at Rs283 billion for FY2014-15. These steps are promoting fiscal centralisation, which is contrary to the 18th amendment


In the budget, estimates for revenue and expenditures are far from realistic. The tax revenue target of Rs2.8 trillion is ambitious given the current economic growth, while the current expenditure target is conservative and the development budget is a bit higher.

When the ambitious revenue target may not be achieved and the current expenditure would increase, the ultimate hit would be the reduction in the development budget, which happened during FY2013-14; the federal PSDP was scaled down from Rs540 billion to Rs425 billion.

Fiscal discipline will be imposed on the provinces through at-source deductions, and the net expected provincial surplus is estimated at Rs283 billion for FY2014-15. These steps are promoting fiscal centralisation, which is contrary to the 18th amendment.

A few medium-term steps have been taken, which deserve accolade. The government has allocated a decent amount for water and nuclear energy projects. In the future, the main reliance should be shifted to hydropower production, from thermal.

However, the government intends to gradually move to coal. If indigenous resources of coal are tapped, it will bring benefits in the medium term. Otherwise, there is little difference in whether electricity is produced through oil or imported coal in terms of production cost. These two commodities have shot up due to speculation since 2008. It will be better to produce electricity through domestic resources.

The tariff differential subsidy has been reduced from Rs245 billion to Rs156 billion in case of Wapda, and from Rs64 billion to Rs29 billion in case of K-Electric (formerly KESC) for improved governance and recovery. These subsidies have been reduced from revised estimates of Rs323 billion to Rs203 billion by stating that these are not targeted subsidies. This subsidy reduction would entail political cost under the current volatile domestic political circumstances.

Specifically, subsidies are being withdrawn from the power sector, which would translate into further higher electricity prices for the consumers. The electricity prices are already high owing to heavy reliance on thermal power generation, theft and distribution losses. The ‘unintended consequence’ of this high electricity tariff would be an increase in theft, which will further penalise honest consumers.

The stabilisation paradigm diverts the attention from deep rooted structural reforms. The economy direly needs structural change, moving away from the services sector to agriculture and industrial sectors.

Under the current arrangement, the agriculture sector is thrown at the mercy of the market. Apart from a decent package for textile sector, the industrial sector has been ignored on the presumption that the private sector would come forward through an enabling business environment.

In a nutshell, there is a resolve to solve the electricity problem through short- and medium-term measures. Any failure to solve this problem can have a big toll on economic development, as happened in the early 1990s. The resource mobilisation is mainly done through indirect taxes, which will increase the burden on the masses and can fuel inflation.

The current stabilisation package will further delay the long and deliberate structural change, away from the services sector. Finally, the implementation of the stabilisation package is very challenging

under the domestic political environment.

The writer is a PhD in economics from the School of Business, University of New South Wales, Canberra, Australia

Published in Dawn, June 9th, 2014