An ideal situation for the managers of Pakistan’s economy would be non-reliance on borrowed money. However for developing economies like Pakistan – beset with a host of economic aberrations – this is nothing but a dream.
Managing an economy is indeed an arduous undertaking due to a myriad of internal and external factors which are sometimes beyond the control of the government. Borrowing from internal and external resources is an imperative for economies like Pakistan. But what is important is that the money borrowed should be gainfully invested so that the repayments can be made from resources that are generated by those investments, and the residual money can also be diverted to productive channels. Borrowing for the sake of repaying debts can put the economy under further strain.
Unfortunately, the economic situation of Pakistan at the moment is quite worrisome. It owes its current dilemmas to the wrong policies of successive governments over the years and the global factors that have had a debilitating impact. I could not agree more with the remarks of Finance Adviser Dr Hafeez Shaikh, made in the foreword to the Economic Survey issued by the government. While explaining the state of the economy and the lack of stability, he says: “This instability was a result of structural weaknesses in the economy which had remained unaddressed for decades. Insufficient policy action over the past two years aggravated the macroeconomic imbalance. The stabilization measures taken by the government have helped in lowering the trade deficit with higher inflows of workers’ remittances leading to an even larger reduction in current account deficit.
“However these measures, although critically essential, had some short-term costs in terms of larger fiscal deficit, higher inflation and lower GDP growth. Besides these macroeconomic challenges, the economic indicators have also been impacted by a global environment where protectionist tendencies are on the rise and global monetary and economic conditions have constrained international capital flows”.
The cumulative effect of the factors mentioned above is that the PTI government inherited an economy beset with alarming fiscal deficit, highest ever current account deficit, astronomical debt liabilities and depleted foreign exchange reserves. The formulation of a budget in such circumstances is indeed a very excruciating undertaking. To judge and evaluate the budget one would therefore have to look at how far it purports to address the confronting challenges.
Economies cannot be run on the basis of loans only. Raising indigenous resources to bring down the budgetary deficit and meeting development needs is absolutely imperative to achieve the desired results. This means broadening the tax base and introducing required structural macroeconomic reforms. From that perspective it is encouraging to note that the buzzwords of the current budget are austerity and taxation. These are inescapable policy options and require political will and determination by the government in view of the political costs because it will certainly impact the lives of the people combined with the structural reform programme of the IMF.
Notwithstanding the criticism being hurled by certain quarters on different aspect of the initiated policies, the budget has indeed addressed some of the bigger challenges. It lays focus on primary deficit which will surely help check the trend of piling up of the debt liability. The fixing of the tax revenue target at Rs5550 billion, compared to the revised estimate of Rs4150 million, will immensely help reduce the primary deficit.
A good feature of the new tax initiatives is that they are not reliant on increase in the tax rate of existing taxes such as increase in the GST rate or maximum rate of income tax, which people had worried would be the case. Most of the tax measures are aimed at broadening the tax base and the rates have been raised only in cases where room existed for such moves. The removal of distinction between filer and non-filer is also very positive and will help in not only documenting the economy but also enhancing the revenue intake.
Freezing of the defence budget at previous year’s level will save at least Rs110 billion, and the reduction in civil expenditure is likely to contribute Rs30 billion. The government is also thinking of stopping additions to the circular debt within two years. This is a much-needed step to dilute the negative impact of the circular debt. Development expenditure has been budgeted at Rs700 billion compared to revised estimates of Rs500 billion, which indicates the mindset of the government not to de-accelerate the development work – though the allocation is much lower than it has been in the previous years. This is again a pragmatic option in view of the state of the economy.
Financing of the deficit has been quite a nagging problem for the government. In the budget it has taken a significant step to finance the deficit of Rs3,137 billion. The bigger chunk amounting to Rs1,829 billion will come from external resources made possible by the continued adherence to the IMF programme. The rest of the Rs983 billion is budgeted to be raised from indigenous banking and non-banking sources. The budget also takes care of the poorer and vulnerable sections of society. Substantial allocations have been made for social protection in social welfare programmes like BISP and Ehsaas which will help to some extent in mitigating the adverse impact of the adjustments made by the government on the poorest segments of society.
The government has made a very strong statement through the budget about its determination to introduce the much-needed and much-delayed structural reforms, and also address the internal revenue generation issues. Conceptually, it is hard to take issue with the overall spirit of the adopted measures. However, much will depend on the ability of the government in making sure that the announced measures are implemented in letter and spirit and there are no slippages. It is indeed a very challenging task. Let us end on an optimistic note that the government will be able to do it.
The writer is a freelance contributor. Email: ashpak10gmail.com