Money Matters

Reading between the numbers

Money Matters
By Khalid Rahman *** Asim Ehsan
Mon, 07, 19

The budget 2019-20 can be taken as an economic agenda-setting framework of the ruling political party. At the same time, however, it should not be seen in isolation from overall economic and political environment, which, as is well known, has been increasingly depressing.

The budget 2019-20 can be taken as an economic agenda-setting framework of the ruling political party. At the same time, however, it should not be seen in isolation from overall economic and political environment, which, as is well known, has been increasingly depressing.

Improvement or otherwise, in the overall environment is important as political instability and uncertainty in the economic arena act as a catalyst in worsening conditions for investment and development. Moreover, the budget should also be seen as an important step towards Pakistan Tehreek-e-Insaf’s (PTI) proclaimed objectives including ‘building a just and equitable society’ as enshrined in the Madinah Charter and visualised by the father of the nation (Page 06, PTI Manifesto 2018).

The current budget will also be seen as a critical step in setting the economic direction, keeping in consideration the grim economic situation of the country. The point of analysing the budgetary exercise is to determine as to what extent it addresses the core economic issues of the country; what it provides for to consolidate the gains and what is in there for flourishment and development of economic and business activity, in an environment where various social segments and specifically underprivileged sectors of the society attach a lot of expectations to the budget for their well-being. In this background, the federal budget 2019-20 shall be reviewed, starting with a brief outlook of the key economic indicators of the country in the outgoing fiscal year 2018-19.

The economy is showing worrisome signs in all key economic indicators in the outgoing fiscal year 2018-19. Comparing the data of Pakistan Economic Survey 2018-19 with FY2017-18, a substantial downfall is seen in all sections of the economy. The GDP growth has fallen to 3.29 percent as against 5.79 percent in FY 2017-18.

The downfall in GDP growth has been substantially contributed by each major section of the economy. While the targets set in the budget of 2018-19 have not been achieved, the more troubling aspect is the considerable decline in the growth rates in almost all economic indicators.

Large scale manufacturing (LSM) is posing serious concerns as the growth in the sector is negative. Similarly, agriculture sector is growing at almost a flat rate. The services sector is relatively better but it is also showing a decline compared to the previous year. Inflation has increased to 8.8 percent from 3.78 percent in FY18 and is expected to grow near double figures in forthcoming quarters. Low GDP growth and negative trends in the LSM have seriously contributed to the rise of unemployment which subsequently increases poverty.

High inflation rate and policy rate at 12.25 percent presents an unpleasant picture to attract private investment. The overall worsening situation can be gauged, as an example, from the decline in demand of medicines which normally have an inelastic demand.

There has been recorded an increase in the first three quarters in tax revenue collection compared to the same period of fiscal year 2017/18. Nevertheless, the target for fiscal year 208/19 seems difficult to be achieved as during the first 10 months of FY19, Federal Board of Revenue (FBR) has only been able to achieve 67.7 percent of the revised target of Rs4398 billion for tax collection of whole fiscal year. One of the significant reasons for this shortfall is that a substantial chunk of tax revenue had gone out of catch due to some politically motivated decisions. An apex court’s decision also made contributed to it. Removal of taxes on mobile phone recharges, reduction in rate of income taxes and decline in petroleum levies in particular widened the collection gap.

Budget-making process becomes a difficult task in such deteriorating economic conditions. Consequently, the International Monetary Fund (IMF) bailout package, which the government has opted for, is attached with strict economic policy obligations required to be implemented in order to avail full loan of $6 billion over a period of 39 months. Preparation of budget, while keeping these policy obligations in consideration, has become even more difficult. Thus pressures are evident in the approach of the economic managers involved in the making of the budget of FY2019/20.

The budget lacks direction towards any long term planning; determination of fundamentals in this regard is inevitable to have sustainable economic development and attract private investment. The chronic dependence on debt for financing various types of expenses has not been addressed. In the last three years, the federal government has substantially relied on borrowing from the central bank on high rates of interest. The circular debt imbroglio also continues to mount pressure on the economy. Public Sector Enterprises (PSEs) are posing serious concerns and contributing significantly to gigantic debt issue of the government. These factors eat up a major chunk of revenues, forcing the government to borrow more and more for financing development and even non-development expenditure and the vicious cycle of debt expands.

Another challenge is the continuing phenomenon of fiscal and current account deficit so much so that the interest payment of public debt now equals to 92 percent of the fiscal deficit.

Reliance of revenue collection through high number and rates of indirect taxes is also a chronic disease. It does not portray a sensible and economy- and people-friendly policy. The government’s increased reliance on indirect tax negatively impacts aggregate demand and widens the inequitable distribution of income. Indirect taxes also cause rise in inflation and to curb this State Bank of Pakistan (SBP) has raised policy rate to 12.25 percent, ignoring the fact that we are dealing with cost-push inflation and not a demand-pull one and it is going to hurt the investment environment.

While a number of reasons could be cited as the cause of the above mentioned ills, poor governance adhocism, and more importantly the political considerations in budget-making and other economy related decisions at all levels in the country have historically been responsible for the vicious cycle we are in today.

These deep rooted nuisances have remained the core problems and are still hurting the economy of Pakistan. Redressal calls for a comprehensive long-term strategy, and not just increasing tax rates in every budget. Moreover, one-size-fits-all approach can never be regarded as a prudent policy; indigenous solutions are needed by taking every stakeholder on board for long-term and sustainable economic growth.

Issues and way forward

There is no doubt that the budget 2019-20 has been prepared considering the IMF program. While, IMF programs are always controversial in the country, particularly for not being poor-friendly, it may be justified in view of the worsening economic situation. Hence, there is a near-consensus among the economists that the government lost precious amount of time in approaching the IMF. The delay while caused further deterioration in the economic conditions also made the negotiations with IMF difficult for the country. However, the program is likely to improve the overall discipline and economic management of the country.

Despite containment of civil, defense and development expenditures, the federal expenditure will increase by 28 percent. This is because of substantial increase in funds allocated for mark-up on domestic debts and foreign loan repayments. Seen in this backdrop a positive initiative in the budget towards efforts of reduction of public debt in future is the announcement of ban on government borrowing from the central bank.

As the two major crises faced by the country are fiscal and current account deficits, focus of the budget and other economic policy measures is shifted to these grounds rather than higher growth for the time being. Currently, the primary deficit is at 2.4 percent of the total GDP, whereas the policy obligations of the IMF ask to reduce it to 0.6 percent during this year. This is a big challenge but looking at the budget measures serious efforts appear to be lacking in this regard. Hence, it is given that if quarterly reviews of the economy are not satisfactory, stricter policy obligations may be implemented. Similarly, current account deficit is also not seriously addressed, though imports are contained but on the other side exports have declined too. There is a strong need to focus and alter consumption patterns at every level of the government and the society and therefore it should also be a part of social and educational agenda along with necessary economic measures.

Current economic situation is not favorable for investment and manufacturing as production costs are increasing coupled with reduction in subsidies in energy which will also cause increase in cost of doing business. It is now time to come up with innovative ideas and policy initiatives for involving private sector in provision and distribution of energy. The global experiences, including even in some neighboring counties, in this regard stress to go for a shift from public sector to private sector in producing and providing the utilities. Large scale production and promotion of renewable energy sources will reduce burden on the government expenditures.

While the PTI in his manifesto (Page 30-31, PTI Manifesto 2018) had committed not to privatise Public Sector Enterprises (PSEs), it appears to have now altered its approach and has included Rs150 billion of revenue in Budget 2019/20 to be earned from privatisation of the state-run entities. There is no doubt that privatisation of the PSEs is a sensitive subject since it involves a large number of employees working there besides other related issues. It however is to be realised and the nation needs to be educated that while the rights and privileges of PSEs’ employees should be protected as much as possible, they are part of a nation of 220 million which is constantly facing the huge burden of their losses. A comprehensive approach by involving all stakeholders and evolving a political consensus are needed in this regard for both revival and privatisation of these entities.

Current budget has not addressed small and medium enterprises (SMEs) and nothing significant is found on enhancement of total factor productivity, which is tantamount to augmentation of economic development and reduction in unemployment. In such a depressing economic environment serious attention should have been put on private sector investment which is a significant contributor to GDP and holds a pivotal position in the creation of jobs.

Another area where PTI has deviated from its promises is that of rationalisation of tax system (Page 26, PTI Manifesto 2018). In the current budget indirect taxes are not taken as an ill to be treated, rather more emphasis and reliance is put on indirect taxes to achieve an ambitious target of Rs5,555 billion collection out of which Rs3475 billion is proposed to come from indirect taxes (an increase of Rs1,000 billion from previous year’s target) and Rs2,081 billion from direct taxes which is Rs400 billion increase as compared to previous year. The FBR reforms were also a promise of PTI (Page 26, PTI Manifesto 2018). The institution is criticised a lot in the context of not having capacity to fulfill its own proposed tax targets and therefore requires significant reforms and capacity building. There is however no significant move seen until now from the government. Continued reliance on indirect tax is partly due to this reason as well. Amidst a GDP growth rate of 3.3 percent and policy rate of 12.25 percent with contractionary fiscal policy, huge target of tax collection looks difficult to achieve.

The GDP growth for the next year (2019-20) is targeted at 4 percent against 3.3 percent this year. This is a modest target and should be achievable. The macroeconomic framework contained in the budget documents forecasts it to reach 4.5 percent in (2021-22). This moderate scenario falls far short of the PTIs commitment and people’s expectations, as lower growth rates of 3-4 percent are unable to create enough jobs for all the people and so joblessness will increase. It will further lower the already low social economic ranking of Pakistan in the comity of nations. Thus in the medium- and long-term perspective the issues needing effective attention are: higher sustained and inclusive (focusing on poor and disadvantaged groups) growth, raising national savings and investment, greater self-reliance, enhancing factor productivity and human development and welfare. Initiatives have been taken in the social sector by doubling funds for Benazir Income Support Programme and launching Ehsaas program. These are commendable measures but not enough to eradicate the poverty and trigger a sustainable growth.

The focus of the government policies should be diverted towards the betterment of governance and distancing political preferences from the economic policies. Ambitious yet desirable initiatives are being announced in education, health, housing, employment, poverty and other fields. These may however be handicapped by a lack of availability of financial resources and management capacity to effectively implement them. Innovative and pragmatic approaches should be explored. It needs to be emphasised that resources are abundant but lack of confidence and trust among different economic stakeholders is needed to be enhanced by developing strong strategic communication narrative by the government. This would help in aligning all stakeholders with the positive efforts of government towards the betterment of the economy.

The writers are development economists