August Issue 2015
Budgeting for Stagnation
The federal budget for the fiscal year 2015-16 overwhelmingly exuded the universal prescription that the IMF usually sells to all its captive debtor countries as a panacea, no matter what their particular economic ills. If anything, one could detect heavy bureaucratic brushes, both of the IMF’s as well as that of our finance ministry’s, in the budgetary proposals. And if there were any political touches in the balance-sheet one missed them completely except, however, the proposal to increase the salaries of government servants by more than 10 per cent at a time when the official rate of inflation is recorded at around a little over five per cent. Therefore, one fails to understand the irate vehemence with which the PML-N government, especially the federal finance minister, Ishaq Dar tried to defend the proposals.
Paradoxically, the political touch of salary increases in combination with the IMF-forced massive withdrawal of subsidies would certainly send the rate of inflation galloping to double digits even before the year is half-way through. The cost of electricity alone is likely to go well beyond the reach of the middle classes with the poorer classes seemingly destined to suffer a life of total darkness for an indefinite period. Cost of production all around would also shoot up because of the anticipated steep escalation in the cost of energy. And this, in combination with the political decision to keep the rupee over-valued as opposed to the IMF’s advice to let it creep down in-step with its realistic exchange rate as measured on a daily basis against a basket of hard currencies, would certainly render our limited list of exportable surpluses non-competitive in the international markets while at the same time the over-valued rupee would be subsidising imports, even the unwanted ones, thus further widening the trade gap.
The total outlay of budget 2015-16 is Rs 4,451.3 billion, which in size, is only 3.5 per cent higher than that of budget estimates of 2014-15. And if adjusted to the current rate of inflation, the size of the incoming year’s budget appears significantly smaller than that of the outgoing one — clearly the result of highly restrictive shackles of the IMF’s conditionalities.
The expenditure on General Public Services is estimated at Rs 2,446.6 billion, which is 70.3 per cent of the current expenditure and which in turn is estimated to be around Rs 3,482.2 billion. Out of the remaining balance as much as Rs 955,433 million have been allocated to defence affairs and services plus military pensions amounting to Rs 174,271 million, foreign debt amortisation (mark-up and instalment) amounting to Rs 427,592 million, local debt mark-up amounting to Rs 1,168, 676 million, civil pensions Rs 56,729 million, grants and transfers Rs 409, 875 million and subsidies Rs 137,603 million.
These are all fixed expenditures. There is no room under these heads for any reductions. Still, a saving of Rs 105,645 million has been effected in subsidies that would add, as stated earlier, further to the inflationary tendencies upsetting adversely the domestic budgets of both the middle and poorer classes.
The size of the Public Sector Development Programme (PSDP) for 2015-16 is Rs 1,513.7 billion. Out of this, Rs 813.7 billion has been allocated to the provinces. Federal PSDP has been estimated at Rs 700 billion, out of which Rs 252.6 billion to federal ministries/divisions, Rs 271.9 billion to Corporations, Rs 20 billion to Pak Millennium Development Goals and Community Development Programmes (MDGs), Rs 28.5 billion to the Special Federal Development Programme, Rs 7 billion to the Earthquake Reconstruction and Rehabilitation Authority (ERRA), Rs 100 billion for the Special Development Programme for Temporarily Displaced Persons (TDPs) and Security Enhancement, and Rs 20 billion for the Prime Minister’s Youth Programme.
Resource availability during the year is estimated at Rs 4,168,30 billion. Provincial share is estimated at Rs 1,849.4 billion which is 7.5 per cent higher than that in the out-going year. And external receipts are estimated at Rs 751.5 billion, showing an increase of 12.1 per cent over last year. Bank borrowing has been estimated at Rs 282.9 billion and net capital receipts at Rs 606.3 billion.
Most of the figures quoted above would certainly undergo, like they have every year over the last so many decades, a change for the worse because as usual the Federal Bureau of Revenue (FBR) would, once again, fail to collect the budgeted revenue, necessitating serious curtailment of the development budget because as pointed out above there is no room to save a single rupee from the current expenditure head. The reduction in the development budget is more likely to impact adversely on the social and physical infrastructure projects.
The rich in Pakistan have many tricks up their sleeves that help them avoid and evade paying taxes due on their incomes, while the poor and the middle classes find it impossible to escape the indirect taxes on their consumption. The politically powerful feudal aristocrats have consistently succeeded in protecting their income from the income tax net. The affluent professionals, including doctors, lawyers, engineers, big builders, real estate agents, high-end educational institutions, hospitals and other such private sector concerns share the taxes on their incomes with the tax collector and the treasury while keeping the bulk in their private lockers. Part of this loot goes out of the country through informal channels mostly to the Gulf countries and comes back through formal channels as remittances thus whitened and the other part of the evasion fuels the black economy. According to the finance minister himself, the informal economy has now more than equalled the formal economy and is expanding by the day.
There has been a lot of talk over the last several years about documenting the economy. But every time it has been tried, the move has failed, primarily, because the corrupt FBR personnel create all kinds of hurdles in the way of the policy’s successful implementation while those who are now out of the income tax net or those who have been successfully avoiding and evading income tax due to them all these years use their political clout purchased with their black loot, to successfully kill these policies in the parliamentary committee rooms or in the cabinet. Recently, NADRA provided to the government a list of over three million persons that qualify to enter the income-tax net but, the rich and the powerful seem to have managed to make the list disappear into thin air.
According to the rule of thumb, Pakistan’s economy needs to grow at an annual average rate of around eight per cent consistently, for at least 10 years to be able to just about make both ends meet. But in order to grow at this rate the economy needs an average annual investment rate of 25-30 per cent of the GDP. However, since currently our saving rate is no more than 14 per cent of the GDP because of our consistent failure to reform our direct taxation system (now totally dependent on withholding taxes), our dependence on domestic and external loans (taxpayers resources of donor countries) has kept on increasing. But most donor countries, as well as multilateral donors, seem to be losing patience with our ruling elite’s profligacy and are, more likely than not, to either close this dole-tap for good or reduce the flow of dole to a trickle.
We cannot continue living the way we have these last 68 years and hope to remain physically intact as an independent country for long. If a citizen does not have access to affordable education facilities, affordable health cover, affordable drinking water, affordable clothing, affordable housing, affordable inter-city and intra-city transportation, affordable telecommunication facilities and affordable access to banking facilities, he or she is hardly likely to feel a sense of belonging to the state. That kind of a state becomes too fragile and will be unable to withstand even a slight internal turmoil.
Many a renowned economist of international repute believes that social market economy is the answer to all the economic ills of countries like Pakistan. Such an economy allows the private sector full freedom but within the strict parameters of regulations, keeping both the politicians and the richer classes from manipulating the markets in their favour while consigning the majority to perpetual poverty.
Pakistan lacks capital, energy and technology — the three most important ingredients that take a country on the fast track to prosperity. But we have two other advantages which, if used intelligently, are expected to compensate for the lack of the above-mentioned three. The first is our youthful population, and the second, our country’s strategic regional location making it a hub of trade routes from all around — from Casablanca in Africa to Urumqi in China and from Myanmar in Southeast Asia to the far reaches of Central Asia and the Middle East. If we could turn this youth bulge into a highly skilled population, well-versed in technology and managerial ability, in the shortest possible time and at the same time convert our economy into a ware-house/trans-shipment economy, the country would perhaps benefit immensely without much loss of time when the proposed China-Pakistan Economic Corridor is completed along with economic zones on the route from Gwadar in Balochistan to Kashgar in Western China, where value addition would be done for onward shipment to all four corners of the region.
This article was originally published in Newsline’s July 2015 issue.