June Issue 2017

Government officials escort a vehicle carrying bundles of budget documents

There is nothing in the budget for 2017-18 to write home about. It is a budget of the status quo. No doubt, an attempt has been made to play to the gallery by promising goodies for almost every sector of society, hoping perhaps to improve the incumbent’s chances in the next election.

But this seeming profligacy in the Pakistan Muslim League-Nawaz (PML-N) government’s final budget is based on taxation measures that attempt to impose an additional burden on those very people that meet their national financial obligations honestly and those who are subjected to extortion under the withholding tax head, which makes up the largest component of the revenue income. Such measures, instead of improving the collection only end up increasing tax evasion, thus depriving the exchequer of even the minimum that is its due. And this leads the government of the day to borrow left, right and centre, to pay for even the minimum of its obligations, such as civil administration, police, judiciary and the military. The increase in the debt burden ends up eating into the expenditure on other heads, especially the development budget in the shape of interest payment, plus the principal.

The perpetual resource constraint has already taken a serious toll on the social sector, particularly on education and the health-cover. The expected shortfall in income is partly due to an anticipated new wave of tax evasion and partly the unanticipated additional expenditure in the non-development budget, under the heads of civil administration, law and order and defence, owing to increasing tensions on our borders with India, Afghanistan and Iran. This is expected to enlarge the already budgeted gap between income and expenditure, thus shooting way past the fiscal deficit budgeted for the next year, forcing the government to go for more borrowing and leaving very little in the banking sector for private sector investment needs.

Since the Federal Bureau of Statistics (FBS) is not an autonomous department and continuous to be controlled by the Ministry of Finance, there is the suspicion that the growth rate that the country is said to have achieved in the outgoing year is likely to have been exaggerated. So, while the growth rates of various sectors and the overall economy show a positive trend, the aspects that could not be tampered with, such as the current account deficit, reflect a completely different picture of the economy. It is, therefore, difficult to understand how the government hopes to achieve a growth rate of six per cent next year, especially when our savings rate continues to be the lowest in the region and as a corollary, the investment rate has also remained low and there are signs that it would not im-prove with the savings rates stagnating.

The remittances are showing a declining trend, while exports too have remained depressed, showing no signs of revival. In such a situation the government would find it impossible to achieve the growth target for the next year.

Also, there is no attempt to reform the taxation system in the new budget. As a consequence, the black economy is likely to further surpass the white. You see a construction boom in the country. This has led to a boom in the manufacturing sector, in house-ittings, paints and white goods. You see shops in urban Pakistan full of white goods. At the same time, most cities in Pakistan are now filled with eating-houses, brimming with customers, while shops too remain over-crowded. Every white rupee invested in real estate and in the purchase of house-fittings and white goods, as well as that spent in the eating-houses turns black — at least 99 paisa of the Rs. 100 — while officials of the Federal Board of Revenue (FBR) look for a cut.

This system only helps the rich, as without the collection of taxes there have been no transfers to the indigent, especially in the education and health sectors. As a result, most citizens are deprived of affordable education, affordable health cover, affordable housing, affordable transport and communications, leading to increased poverty. In fact, we see small islands of monumental prosperity in the country, surrounded by a vast and expanding sea of poverty — ideal conditions for the rise of alienation leading to extremism.

Let us take a quick glance at the salient features of the budget to find out if any attempt has been made to break out of the conventional wisdom.

The total revenue is estimated at Rs. 5,310. This includes the FBR tax estimate of Rs. 4,013 billion, as compared to the revised estimate of Rs. 3,521 bil-lion. Compared to revised estimates of FY2016-17, the total revenue is being increased by 12 per cent. While the FBR tax revenue is estimated to increase by 14 per cent.

– Out of the total revenues, the provincial government’s share is estimated to be Rs. 2,384 billion as com-pared to the Rs. 2,121 billion revised estimates for 2016-17, showing an in-crease of about around 12.4 per cent. These resources will be utilised by the provincial governments in enhancing human development and security.

– After transfer to provincial governments, the net revenue of the Federal Government is estimated at Rs. 2,926 billion in 2017-18, as com-pared to revised estimates of Rs. 2,616 billion in the current financial year.

– Total expenditure for 2017-18, is budgeted at Rs. 4,753 billion, compared to the revised estimates of Rs. 4,256 billion for 2016-17, showing an increase of 11.7 per cent. Out of the to-tal expenditure, the highest increase is accorded to the development budget.

– The defence budget is proposed at Rs. 920 billion, against the revised budget of Rs. 841 billion in the FY2016-17;

– The Public Sector Development Plan (PSDP) budget is being increased from revised estimates of Rs. 715 bil-lion to Rs. 1,001 showing a 40 per cent increase.

– The result of the above revenue and expenditure estimates is that the budget deficit will be reduced to 4.1 per cent of GDP, as opposed to 4.2 per cent of GDP of the revised budget esti-mate in the FY2016-17.Targets set for 2017-18:

– Real GDP Growth of six per cent. Investment to GDP ratio of 17 per cent. Inflation below 6 per cent. Budget deficit at 4.1 per cent of the GDP. Tax to GDP ratio at 13.7 per cent. Development expenditure of Rs. 2.1 trillion. Foreign Exchange Reserves level to cover a minimum of 4 months’ imports. Net Public Debt to GDP ratio below 60 per cent. Elimination of load-shedding by addition of 10,000 MW of electricity to the National Grid by Summer 2018. Continuation of targeted social interventions.

This is all in line with the conventional wisdom that had guided our successive governments while making annual budgets. And promises made on the back of measures proposed in the budget for the incoming fiscal year are hardly likely to be achieved. Except, of course, for a seemingly mindless spending spree that is inbuilt in the development plan and is likely to be directed towards PML-N ‘electables’ in Punjab, to ensure that they do not flee the coop under pressure from the Panama investigations.

French Economist Thomas Picketty, (Capital in the Twenty-First Century) has debunked the theory that growth takes care of the indigent through a ‘trickle down’ effect. Instead, according to Picketty, growth effects ‘trickle up’ and causes massive inequality.

In any case, Pakistan’s economy needs to grow at an annual average rate of 10-12 per cent for at least a decade, for the so-called ‘trickle-down’ theory to prove its economic viability. Indeed, this is the kind of growth-rate that is required to be sustained for at least 10 years at a stretch, without any break, to supposedly alleviate the poverty in the country. To accomplish this, we need to invest on an annual average rate of 35 per cent of the GDP.

To achieve such a high investment rate, we first need to achieve an annual domestic savings rate of at least 30 per cent of the GDP. But our current rate of savings is an abysmal 7.5 per cent. One way of overcoming this low rate of domestic savings is to go around the world with a begging bowl in hand. This we have been doing since independence, and will be doing the same next year as well. But we have done nothing with most of the dole received so far, other than to create false affluence and add to the national debt. More of the same is not going to make us behave differently.

The other way of extricating ourselves from this impossible situation is to emulate the economic models that were adopted by countries that were once referred to as the Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan). But the global economic circumstances are not currently favorable for emulating this model. The China model demands three decades of belt-tightening. This appears to be an impossible call for Pakistanis.

Pakistan’s exports are plummeting partly due to a collapse in demand for our raw commodities and low-value added products, and partly because we lack exportable surpluses in items that are in demand globally and/or regionally. In fact, we do not make such items at all. Other than China, we have next to negligible trade relations with countries of the region.

Let us take a look at our compara-tive advantages:

1.We are an agricultural country

2. We are a market of about 200 million people

3. We are Pakistan is located at a crossroad of trade routes, from Casablanca to Kashgar and from Thailand to Turkey.

These advantages can be exploited to our benefit if we really turn our attention to agriculture and develop its downstream and upstream production chain, not only for local consumption, but also for export to the four corners of the globe.Indeed, recent media reports quoting the Long-Term Plan on the China-Pakistan Economic Corridor (CPEC) prepared by the National Development and Reform Commission (NDRC), the Peoples’ Republic of China and the China Development Bank, have revealed that it is the agricultural sector in Pakistan which is expected to get an immediate boost, following the launch of China’s Belt and Road Initiative.

The plan is said to outline an engagement that runs from one end of the supply chain to the other. Apart from providing seeds and other inputs, such as fertiliser credit and pesticides, Chinese enterprises will also operate their own farms and processing facilities for fruits, vegetables and grains. Logistics companies will operate a large storage and transportation system for agrarian produce. Here, it wouldn’t be out of place to recall that in 2009, the Saudis and Gulf Sheikhs had wanted to lease our agricultural land to grow food for their own consumption, but due to opposition from our farming community, the idea was abandoned.

Converting our economy into one that effectively facilitates transshipments would require a well-thought-out trade policy that would allow an almost free-of-duty entry of raw materials, intermediaries and equipment in knock-down condition, to be ware-housed in Pakistan and then forwarded to the final destinations after the required value addition.

Such a regime would also require letting the rupee float on its own, without the support of any artificial crutches. Such a policy would also attract foreign direct investment in avenues that are more economical for sponsors to fabricate items inside Pakistan, for local consumption. These can also be re-exported from the ‘hub’ of Gwadar. This will also facilitate the transfer of technology and training of skilled manpower.

Transfer of appropriate technologies would also open the way for Pakistan to graduate from being a pre-dominantly agricultural country to a leading exporter in high quality processed foods and light manufactured goods.