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Editorial

May 27, 2017

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Budget 2017-2018

Budget 2017-2018

There were not many surprises as Finance Minister Ishaq Dar unveiled the PML-N government’s final budget before next year’s general elections. Dar painted a picture of a country that was on the verge of default in May 2013 and is today on the ‘cusp of a high economic growth trajectory.’ The budget shows a 5.3 percent growth in GDP, the first time in over a decade that a figure just past the five percent mark has been reached. However, for understandable reasons, what Dar did not highlight is the fact that there is also a current account deficit of $8.5 billion by the end of the year – something that essentially exposes deep-lying economic flaws. The government’s explanation that ‘machinery imports’ account for this could be true but also underscores the fact that Pakistan requires large imports while its exports continue to decline steadily. The GDP growth has also been inflated by agricultural production returning to normal after an exceptionally poor 2015-16. To the government’s credit, tax revenues have increased by 81 percent          in four years, which is a big plus – as is the reduction of the budget deficit to 4.2 percent of GDP.

The 2017-18 budget seems padded with populist measures designed for election year, but which are of little value to the economy’s health in the medium to long term. This goes against Dar’s claim that the PML-N completed its structural reform agenda within four-years. As farmers staged protests and faced the police in Islamabad over cuts in subsidies on fertilizer, Dar presented the small measures that were on offer for the agricultural sector as radical ones. The fine print tells a different story, though. The measly Rs50,000 loans on discounted rates for small farmers may seem like a good measure, but offer no remedies to the larger problems in the agricultural sector. The same can be said about the increase in power subsidies for farmers. Both are stop-gap measures, which may be good politics but hardly make for good economics in the long run.

The presence of numerous subsidies and special packages built into the budget also contradict claims of economic stability. Both the agricultural and export sectors remain heavily reliant on subsidies. Although the finance minister announced a number of measures to help improve the technology used in major export sectors, none of the tax cuts on the import of new machinery will make any sense without an end to the serious power outages the country faces. What would tempt industrialists to invest in new technologies when they are unable to run their factories at full capacity? The promise to end industrial power outages this summer is a recognition of this fact – but four years of such promises means trust is low on this matter. The finance minister has promised addition of 15,000MW to the power sector in the coming years, almost double the country’s existing power capacity. Not only can the government not deliver on these promises, Pakistan is in bigger trouble if it actually manages to do so. The problem of the power sector continues to be misrepresented as one of adding power capacity. In fact, the issue is one of structural reform, which the government has shown no seriousness in tackling. Circular debt has spiralled up to the levels we saw in 2013. Eliminating it would on its own be enough to bring power outages down significantly, but there are no serious measures on offer in the current budget to tackle this issue.

Unsurprisingly, there is little in the budget for the poorest classes in Pakistan. The minimum wage has been raised to Rs15,000 – an increase of Rs1000. Social sector spending will see increases, but these are unlikely to improve baseline education and health figures. Sixty-seven percent of the development budget of Rs1,001 billion will remain focused on infrastructure. Real economic improvement comes from improving the quality of jobs available for the poorest segments of society, which requires improving the basic skill levels of the workforce as well as enforcing basic labour rights such as unionisation. Free of the IMF’s shackles – as per government claims – one would have expected a bolder budget. The government reported better tax collection over the year with an improvement of nearly 80 percent compared to the previous year. Taxation targets have increased to over Rs4,000 billion, but how that will be achieved remains more uncertain given the number of new tax reductions in the budget. As we have now come to expect, defence continued to take out a huge slice from the budgetary pie, with its allocation increased to Rs20 billion for 2017-18. There has also been a 10 percent increase in salaries for federal government officers and a ten percent special allowance for army officers. Alongside defence, debt servicing continues to take away the largest chunks from Pakistan’s pile of resources, alongside administration. Any significant change in the economic situation would require a rethink about each of these aspects of expenditure.

Pakistan’s spending on education and healthcare over the past two decades has been the lowest in the region and amongst the lowest in the world. There is no evidence of any improvement in this. While there has been a write-off in loans for widows and an increase in the number of families in the Benazir Income Support Programme, this is really just a dot in a landscape marked by growing poverty in a country where 50 percent children are stunted and the lack of literacy of nearly half the population continues to mark the faults within our system. In the end, this is a budget that will not be judged on its ability to increase revenue, or even the growth rate, despite all the promises. This is a budget that will largely be judged on its ability to end the power crisis plaguing the country.   It is there that the government’s promises time may to be put to test at the ballot box. We must also not forget – amidst all the economics talk – that our real challenge lies in development and economic policies that look beyond the immediate and take into account the needs of people who live lives of acute deprivation.

 

 

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