Econometrics at its worse

The appearances are misleading. So are the fudged up projections and various concessions. Finance Minister Ishaq Dar deserved laurels from the treasury to have made the opposition clueless with the display of his great skills at econometrics.

With loud claims of fiscal stabilisation in his fourth budget speech, the finance minister has vowed to pump up growth that he has so far failed to achieve, except construction and communication, etc. In spite of favourable exogenous factors, such as falling commodity prices in the international market that brought down inflation and created much needed fiscal space, the PML-N government has missed most targets in the outgoing fiscal year, including GDP and exports. The GDP growth, according to leading economic researchers, has not gone up above 3 percent. The projected GDP growth rate of 4.7 percent is due to over-stated growth in 10 out of 18 sectors and lower estimates of loss in cotton production; the cotton was actually 34 percent down according to ginning sources.

Although the measures announced to alleviate the sufferings of agricultural sector are eye-catching, they are not as substantial as they may appear. Fertilizer prices have gone down in international market by 40 percent and the government transferred just 5 percent of it to the farmers. Instead of reducing fertilizer price by Rs400, it should have been reduced by Rs1000. The government should simply be importing more fertilizer which is 15/20 percent cheaper than domestically produced.

Reduction in tubewell tariff is welcome, if various levies are waived and peak-hours’ tariff is also reduced. But, given the steep rise in productivity and crash of prices in international market, these measures may not help much to infuse higher productivity and efficiency in our agriculture. It requires fundamental agrarian reforms in agrarian relations, social structure and revolutionising the means of production to acquire greater productivity.

Decline is also visible in most of the industrial sectors due to loss of purchasing power of rural population and decrease in almost all types of exports and closure of Pakistan Steel Mills. Indeed automobiles, construction, cement, etc., did show good amount of progress. Even the power generation is behind last year’s quantum of electricity. The circular debt in the power sector continues to hover around Rs640 billion. The losses in Public Sector Enterprises remain to the tune of Rs600 billion in the absence of restructuring. The incentives to boost exports are laudable, but a too narrow a base of the structure of our exports will keep our balance of trade vulnerable.

Our debt profile is getting most precarious with each passing year and we are going to face the burnt when Paris Club’s rescheduling ends and the cost of debt servicing may go up to $13.6 billion by 2017-18 at the end of the tenure of the current government. Currently foreign debt is one-third of our total debt as domestic debt climbs up to two-thirds of our total debt while it was half the total in 2010. It may be noted that the foreign debt is much cheaper (@1.9%), except for the high cost Euro bonds, and domestic debt is much costly (@10.7%).

Thanks to a cheaper official interest rate of 5.75, the private banks make hey by borrowing on half the rate they invest in treasury papers. What is not understandable is that why do the monetary policy and the State Bank continue to provide such an easy money making leeway to the private banks who prefer to invest in government securities rather than in productive businesses? Annual cost on debt is now Rs1.3 trillion—92% on domestic and 8% on foreign. No strategic measures were announced to tackle this trap, despite proposing a ceiling.

On the taxation side, Mr Dar has tried to ease the taxation restraints on the exporters and tighten the grip on non-filers. But, he has not taken any strong measures to reverse the ratio of direct and indirect taxes. While indirect taxes continue to be in the range of 63 percent (1914-15), the share of withholding tax in income tax has gone above 60 percent. The policy continues to be of burdening the poor and avoid taxing the rich. The gaps in taxation continue to widen. The income tax on corporate sector is merely 3.7 per cent of the GDP—60 percent of the companies registered with SECP who file returns show no profit. While industry takes the 73 percent of the burden, agriculture sector hardly pay one per cent in taxes. As the salaried and professional sections remain hard pressed, the traders being PML-N constituency continue to evade or avoid taxes.

It is too late for the PML-N government to push an agenda of reforms for the mid-term. In the next two years of its tenure, the government will not be able to achieve 7 percent of GDP growth, 21 percent investment to GDP ratio, nor will it be able to raise the ratio of taxes to GDP to 14 percent, as announced by the finance minister in his mid-term future plan till 2019.

The failure of the government is visible in introducing a just taxation system and put the economy on a sustainable course. With the current low levels of investment, savings and taxation as a percentage of the GDP, there is no scope for a dynamic and organic growth and development. It neglected human resource development and social sectors while pursuing a “highway model”. As costs on debt-servicing and over-extended security agendas continue to rise, there is no fiscal space left for the people to have hope in their future and they are left at the mercy of paltry handouts introduced during the last government.