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Hard realities ignored

June 03, 2012

THE current budget presented by the harassed finance minister to the National Assembly on Friday does not give a sense of precarious economic times in Pakistan.

The investment rate is at record low, domestic savings rate is falling, fiscal, current account and trade deficits are ballooning, currency is weakening, pressure on foreign reserves are mounting, unemployment is increasing, social indicators are depressing and hopes of outside help are not high.

There is little doubt that dole outs, tax breaks to salaried class, increase in salaries of state employees, reduction of FED on cement, etc. have earned political capital for the government.

But will it also be viewed positively by donors? It seems doubtful. Some suspect that the tax relaxations actually would not be seen favourably by the donors.

If foreign inflows are not resumed soon, the State Bank of Pakistan will be asked to further loosen its grip on the monetary policy for meeting government budgetary needs. Deficit financing and monetary expansion will unleash inflationary spiral and weaken the national currency.

During his speech Dr Hafiz Shaikh did not look particularly enthusiastic. But his budget speech seemed to have ignored the dark economic realities. It was like a ‘normal’ budget presentation in an election year presuming ‘normal’ economic conditions.

The budget has something to offer to everyone and almost nothing to address the structural weaknesses compromising the country’s real economic potential.

On the policy front, it proposes more of the same: backtracking on steps necessary for stabilisation (broadening the tax net and restraining expenditure); not forthcoming on demands of growth (creating business-friendly environment for private investment and enhancing public sector investment in infrastructure projects).

How well the budget serves the people will be debated in the parliament and outside but it does seem to serve the ruling party well.

The public criticism, as reflected by the media, is directed more towards the opposition conundrum in the National Assembly than to the contents of the budget. The rowdy protests in the assembly hall during the speech rendered Dr Hafiz Shaikh inaudible.

As expected the key annual economic document is mysteriously quiet on the source of financing of the income-expenditure gap. Over the last fiscal the government was forced to curtail development expenditure as envisaged foreign inflows from Coalition Support Fund, deposit of the Etisalat des and proceeds from the sale of 3G licenses to telecommunication giants did not realise.

Besides the IMF disbursements stopped abruptly early last fiscal when the donor withdrew the $9 billion support programme midway citing frustration over the country’s lack of fiscal discipline.

Currently, hostile Western environment does not permit to make projections of any support from foreign sources even on paper. It makes deficit financing the only option available to the government to meet its expenditures and also to cover the cost of revenue shortfalls because of tax relief and incentives.

The stakholders in the currency, commodity and the capital markets were still busy interpreting the budget proposals from their positions.

The initial reaction was neither positive nor negative. Some alarm was expressed over the prospects of runaway inflationary trend over the year ahead.

The private sector generally received the budget with verbal facilitation but a long face.

All city chambers and their federal forum expressed cautious optimism. The concessions to cement and drug industry, two high performing sectors, may support bounce back in manufacturing sector.

More serious segments of big business in Pakistan did not share the general sense of relief over budget. Some economists suspected tinkering with data by the economic team to present a palatable economic picture in an election year. They suspected the actual growth to be under three per cent over the just concluded fiscal.

Humayun Bashir, President Overseas Chamber of Commerce and Industry, sounded disappointed over telephone when contacted after the budget presentation.

He e-mailed eight-point initial response of his forum that hails concessions for specific sectors and reduction in turnover tax but expressed concerns over no specific measures to broaden tax net or improve the documentation of the economy.

“This budget appears to be quite traditional without any innovative and bold initiative. The revenue and expenditure targets seem ambitious,” he said.

“In terms of taxation target of Rs2.38 trillion, about Rs400 billion, or 20 per cent increase over last year, appears very high and we need to understand as to how much of this increase will come from new tax assesses. Dr Shaikh mentioned in survey announcement about potential 700,000 rich people to be brought under tax net. We need to know the revenue associated with them,” he added.

“Otherwise raising 20 per cent additional tax in an economy which is growing at a low single digit raises concern.”

“Dr Hafiz managed to keep his head above water with his hands tied. To me it is not a mean feat. I do not see it as too flashy. He succeeded in keeping politicians and their fancy political ideas at bay,” Dr Rashid Amjad, Vice Chancellor Pakistan Institute of Development Economics commented over telephone from Islamabad.

“None of the key challenges have been addressed in the budget. Extraordinary problems beg for radical departures. Not that I was expecting wonders but whatever little I managed to hear failed to inspire me,” Kamran Mirza, CEO Pakistan Business Council, said commenting on the budget.

“Actually the level of expectation from the government was so low that whatever has been given has pleasantly surprised people. The government succeeded in skillfully using the opportunity of budget presentation to its advantage,” commented an analyst.

The budget would, in all probability, still be passed in haste without much ado by the National Assembly before the public goodwill the announced measures has generated, is lost to details.