Promises galore

The Federal Budget presented by Finance Minister Ishaq Dar is a week old now, and has evoked mixed reactions, mostly critical and highly suspicious of government’s ability to meet the ambitious targets set therein. The objectives the budget has set are, building confidence, increased self-reliance, turning private sector into engine of growth, friendlier market regulation, less government role in business activities, betterment of the poor, and development of human resources.

According to the Medium Term Macroeconomic Framework included in the budget, by June 2016 annual GDP growth will gradually go up to 7 percent, inflation will remain 8 percent, investment-to-GDP ratio will rise to 20 percent, and tax-to-GDP to 12 percent. As a fraction of the GDP, current expenditure will drop to 12.9 percent and fiscal deficit to 4 percent, while development outlay will rise to 5.1 percent. Besides, reliance on indirect taxes will be reduced. Above all, foreign exchange reserves will rise to $20 billion.

All this is imperative, but what left doubts in the minds of analysts were the planned strategies for achieving these objectives, given the heavy load of fiscal debt that the regime has inherited whose servicing cost will go up by another Rs 102 billion.

The driver of the government’s huge fiscal borrowing in 2012-13 alone was the shortfall in tax revenues that is likely to reach 374 billion, or 16 percent of the target. According to Dr Hafeez A. Pasha, “this is the highest [shortfall] in the recent history of the FBR.”

Before the announcement of the budget, it was hinted that, in less than a week after taking over the regime won’t be able to discover what it had inherited. As expected, in the Economic Survey, the Finance Minister faulted more than one key indicator as doubtful.

The fiscal deficit of Rs 2,024 billion (revised on June 11) that the regime inherited is Rs 922 billion (or 83.6 percent) higher than that budgeted for 2012-13 because, according to the Finance Minister, many expenses were not accounted for by the last regime. Yet the regime went ahead with announcing the budget, and soon thereafter a threat by federal government employees to begin a protest on June 21, forced it to increase their salaries by 10 percent, which will inflate the 2013-14 current expenditure by Rs 16.5 billion.

The other signs of inadvisable hurry (or desperation?) were the hikes in prices of petroleum products (usually announced on the last day of the month) and, in spite of a petition being filed there against, issuance of SROs making the 1 percent GST hike effective from June 12.

In-depth reading of the budget reveals that the promised 30 percent cut in current expenditure will largely be the result of withdrawing subsidies (Rs 327 billion last year) to the power sector – a move that will sustain the traditional credibility gap the state suffers from.

Increase in GST (preparatory step for negotiating another loan from the IMF?) will certainly push up inflation. Signs thereof are already there as prices of all essential food items have risen sharply. This is not the way to go about strengthening state credibility.

In the context of raising taxes on salary incomes, analysts had suggested a rise in salary brackets over Rs 1.2 million per annum. Instead, taxes have been increased on all brackets but, oddly, there is no increase on salaries ranging from Rs 1.6 to Rs 2 million. About increasing the tax net, the budget didn’t specify a clearly defined strategy (wasn’t it presented hurriedly?) and gave its critics the room to call this a mere praise-attracting slogan. Besides, the net needs to cover far more than just half a million tax evaders.

In 2013-14, tax revenues have been targeted to rise to Rs 2,475 billion (or by 23 percent). This is an ambitious target given the current state of the economy – power shortages and risk aversion in banks for lending to the private sector – the real engine of revenue growth. In 2013-14, as a percentage of the GDP, the budget (rightly) proposes a reduction in current expenditure and fiscal deficit, and a rise in taxes and development expenditure. But what remains in doubt is the targeted GDP growth rate of 4.4 percent.

The biggest stumbling block is the inherited load of public debt that is now Rs 14.5 trillion (63.5 percent of GDP) and prevents raising fresh resources. Besides, exchange reserves have depleted to $6.2 billion from $10.8 billion, courtesy the trade deficit and repayments to the IMF. In 2013-14, the challenge the regime faces is cleansing and restructuring of the fiscal set-up and public sector enterprises (PSEs) for which it needs time and resources, to leave more liquidity in banks for the private sector, not focusing on collecting new taxes.

The need of the hour is mustering resources during this corrective exercise; this requires austerity (promised in the budget), improving market regulation to rebuild investor confidence, and focusing on recovery of the stolen wealth (not referred to in the budget).

Whether this regime succeeds in recovering the amounts due from Etisalat and Coalition Support Fund is a big question mark. Equally doubtful is the successful floatation of the Eurobonds. But what it must go ahead with is the auctioning of the G3 telecom licenses.

The current state of Pakistan’s economy, country risk perception, and the daily events of social disorder, targeted killings and terrorism have rendered Pakistan incapable (at least for now) of floating debt paper in foreign markets, but there are other options that could work.

Industrial zones are promised but are rarely built with an infrastructure making them attractive. This time this exercise must be undertaken seriously so that it actually leads to a rise in investment-to-GDP ratio. Along with revamping the power sector, this should be the top priority.

Pakistani banks can attract foreign currency deposits but only by assuring the depositors against the deposits being frozen, maintaining higher reserves there against, their deployment in restricted loan categories, and more frequent audit of these high priority accounts. These assurances can be provided only by the Central Bank and it should do so in consultation with the stakeholders so that this package sounds credible and leads to a significant rise in foreign currency deposits to build higher foreign exchange reserves.

Last but not least, the regime must work seriously to improve Pakistan’s country risk perception by containing social disorder, targeted killings and terrorism. This should rank at par with the priority assigned to revamping the power sector. The fact that external sources have virtually dried up, especially of a concessional nature, warrants prioritising this aspect of administration.