(Edited version published in “The Nation” July 06, 2008)
Amidst a number of issues the coalition is trying to dabble in, the budget at best has received a passing glance. No deliberations seem to have taken place within the coalition partners or with the many stake holders. Pakistan’s economy needed immediate attention when the government took over. The economy was left in a reasonable state when the previous government left, as was indicated in the first quarter report of fiscal 2007-08 of the State Bank of Pakistan. But the oil prices shot-up after that from $85 to $140 per barrel and commodities became scarce and expensive, thus pushing food prices up internationally. Caretaker regimes rarely take bold corrective actions and the last one was no different.
The new government first went into shell shock and then started telling the whole world, multinationals and bilateral donors alike, the very people we need to work with to keep the economy healthy, how bad things were and how we had fudged our figures, a charge yet to be substantiated with facts. And then came a Budget document with hardly any well thought out initiatives for agriculture, manufacturing, exports or social safety nets and with fiscal targets which are virtually impossible to achieve, politically and economically, that is, if the will to achieve them exists.
When the last government left in November 2007, the per capita income had risen from less than $500 in fiscal 1998-99 to $926 in 2006-07. The GDP had grown at over 7% per year during the 5 years. Agriculture, which was growing at 1.9% in fiscal 1998-99, fluctuated during the 5 years between 1.5% and 6.5%. Large scale manufacturing grew at an average rate of 12% during the 5 years. Tax revenues grew from Rs.375 billion to over a trillion. The KSE index had risen to 15400 with a capitalization of $66 billion from 1300 with a capitalization of $6 billion. Exports had risen to $19.2 billion from $7.8 billion, the PSDP to Rs.520 billion from Rs.98 billion, State Bank reserves to $16.4 Billion from $2 Billion and the Debt to GDP ratio had reduced from over 100% to 55%.
During fiscal 2007-08, large slippages took place. The fiscal deficit shot-up to over 7% from 4.3% of GDP, primarily due to un-sustainable levels of energy related subsidies and sharp decline in external financing flows. As a result the Current Account Deficit shot-up to over 8% of GDP from 5.3%. The CPI in May 2008 had shot-up to 19.2% compared to 6.4% in July 2007. Economic growth came down to 5.8% from 6.8%. Large scale manufacturing dropped to 4.8% and the government borrowing from the State bank reached an all time high of almost Rs.500 billion, close to 5% of the GDP. For the first time in many years, State Bank reserves started reducing rapidly and the debt to GDP ratio took an upward turn. The hard earned macro economic stability was clearly under threat.
It was expected that the new government would have a hard-nosed look at the economy and put it back on track. The current expenditure, particularly the general administration and subsidies related expenditure was expected to be reduced substantially. It was expected that government would focus on taxing the un-taxed sectors and tax payers with greater ability to pay to generate new revenues. All this was required while maintaining a robust growth rate of the economy. As such, initiatives for the sectors of manufacturing, agriculture and exports should have been focused upon. It was expected that the government would try and finance its fiscal deficit through non-inflationary sources like National Saving Schemes and Pakistan Investment Bonds and through reducing its reliance on State Bank borrowing. More expenditure was expected to be allocated for social safety nets as such remedial measures always create excessive burden on poor segments of the society.
But that was not to be. Ideally fiscal deficit should have been brought down to a sustainable 4% level in about 3 years time. A drastic reduction from over 7% to the targeted 4.7% in one year’s time has serious political and economic ramifications. The rapidly sliding manufacturing sector will continue to slide as not a single initiative has been announced to reverse the pattern. While the Prime Minister announced a 40% cut in the PM Secretariat’s budget, no specific cuts have been proposed to bring down the non-interest, non-salary expenditures of the government. The government does not seem to have any political will to bring down the ever growing subsidy expenditure to the budgeted 302 billion rupees. Interest expenditure would be much higher than the budgeted 503 billion rupees. With a sliding large scale manufacturing growth and expected cuts later in the fiscal year in the PSDP, FBR revenues will be below the targets this fiscal year. As a result, the fiscal deficit would probably remain where it ended-up in the last fiscal year. And since internal and external sources of funding this deficit seem to be drying up, the government would once again be knocking at the State bank’s door for borrowing of up to almost 5% of the GDP, whereas a safe level for such borrowing is between 1 to 1.5% of GDP. Inflation is thus expected to continue to grow rapidly.
In order to generate additional revenues, it was essential for the Government to have a windfall profit tax on highly profitable sectors of the economy, a capital gains tax, a progressive personal income tax and tax on the services sector. In the manufacturing sector, initiatives should have been announced for SME’s, human resource development and to bring the cost of doing business down. For example, a direct fiscal subsidy should have been provided to bring the cost of interest down rather than to rely on the State Bank schemes, which simply distort the monetary policy. The presumptive tax regimes on the exports should have been terminated as it is not a major source of revenue. Even with respect to agriculture, measures announced are the same old recipe of just focusing on four crops of wheat, cotton, rice and sugarcane. The acreage and yields have remained virtually static for the last many decades. There is no measure to support the livestock sector or to improve the technological base or the irrigation systems. Therefore once again it will be up to mother nature to determine the agriculture growth rate of the country.
With respect to the social safety nets for the poor, a modest cash transfer scheme has been announced, which if successfully implemented, should very rapidly be expanded. The Baitul Maal programs’ scope should have been vastly expanded. We should have been focusing more on employment guarantee programs, universal health programs and unemployment insurance programs for the poor.
With things the way they are the government will certainly not be able to bring the macro-economic picture in order. Both the fiscal and the Balance of Payment deficits will continue to rise resulting in the continuing reduction of State Bank’s reserves and weakening of the Rupee. As always, in order to have some reduction in the fiscal deficit, after failing to achieve the revenue and expenditure reduction target, the PSDP would have to be significantly brought down resulting in a major negative impact on the GDP growth.
It is fundamental for Pakistan to stabilize its economy to put it on a growth and investment path once again. Historically, Pakistan’s growth rate has never exceeded, on a sustainable basis, the 6 to 7% level. The emerging economies of Asia have grown at much higher levels, in excess of 9%. Even India now is growing at a robust rate of over 9%. Substantive poverty reduction can only take place if we can break this 6 to 7% threshold and move to the 9 to 10% growth levels. I have a warning for Pakistan’s strategic planners. Do not worry so much about fighter planes, missiles and tanks. Worry more about the economy. If India continues to grow at this rate and Pakistan continues to perform at its present level, India will be a far richer country than Pakistan and would be able to have a larger and much better equipped army. The horrifying thought is that we, unfortunately, would then have Indian hegemony thrust upon us. It can be reversed but that needs vision, dedication, selflessness and perseverance. Does anybody see that anywhere?
The author is a former Federal Minister for Commerce of Pakistan