Govt cautioned against making economy reliant on subsidies

KARACHI: Institute for Policy Refor ms (IPR) on Saturday welcomed the fiscal incentives announced by the government in the budget 2017/18 for agriculture sector and industry with a caution that tax relief increases dependability and hurts competitiveness.

“Fiscal incentives work for the duration they are available. They do not always promote efficiency or competitiveness and at times create dependency,” the non-government think tank said in a post-budget whitepaper.

Referring to agriculture sector, it said the reduction in input cost will help, yet agriculture suffers from neglect of water resources and management. “The (budget) proposals also do not address the real issue of improving seeds and restricting virus.”

The IPR’s report said some past incentives that are to lapse have been extended. 

“There is no word about evaluation of whether or not such incentives stimulated growth in the past,” it added. “This is important to ensure that the incentives work and have the desired effect. These sectors need long term support with technology diffusion and access to capital.”

Yet, the whitepaper said the subsidies announced in the budget are 18 percent below than those of 2016/17.

The government forecast a growth of 6 percent for the next fiscal year, while fiscal deficit was targeted at 4.1 percent of GDP as compared to 4.2 percent in the current fiscal year. The budget also proposed 4.3 percent increases in other taxes and 7.4 percent in non-tax revenue. Energy price is likely to increase somewhat for other tax income to grow.

The IPR’s report said industry and agriculture need fundamental reforms to grow.

The government set public sector development programme (PSDP) at more than one trillion rupees for FY18, estimating a provincial surplus of Rs347 billion next year. “In an elections year, it is ambitious to expect it to increase,” said the report.

The report said federal PSDP allocations are 3.3 percent of GDP – 20 percent of the total federal budget of Rs5,104 billion – and with provincial allocations more than 6 percent of GDP. It calls for judicious use of funds to meet the severe shortage of physical and soft infrastructure and human resource deficit in the country.

The PSDP increase focuses ‘overwhelmingly’ on transport, especially on roads and highways. The allocation for roads almost doubles from last year’s Rs165 billion to Rs320 billion. Government’s allocation for the power sector has declined. It has fallen from Rs75 billion to Rs60 billion. The other concern, the report said is a massive increase in discretionary special schemes, almost a quarter (Rs242.5 billion) of the development budget.

It said current expenditure was budgeted to increase 2.3 percent over the current fiscal year. 

“Given that inflation is to be 6 percent (for FY18), this means a decline in real terms and the budget may need revision,” it added. “Limiting increase in current expenditure will be a challenge.”

The report further said managing the balance of payments will be a big challenge in the coming fiscal year. “Current account deficit seems out of control and would likely be more than the reduced amount of $8.9 billion (for FY17).”

“A greater concern is that our export to GDP ratio is in serial decline. The current ratio is 7 percent of GDP. It was 10.3 percent in fiscal 2013/14 and remained above 10 percent throughout the 2000 – 2010 decade,” the report said. “Imports have continued to rise with sizeable increase in machinery imports.”

On debt servicing expenditure, the report said it will further increase during the next year and “stress the fiscal framework and make it that much more difficult to achieve the deficit target.”

“Dependence on external savings means higher debt servicing needs,” it added. “All this has put severe pressure on the balance of payment.”

The post-budget report, referring to a government’s possible move to Chinese assistance to support external sector, said the government “must make public any arrangement. Else, we assume this must be paid back.”

“Most known Chinese assistance is at 3 to 6 months London Interbank Offered Rate plus a premium of 2.8 to 3.5 percent. Their tenure is three years,” it said. “These are commercial terms and they put further pressure on the balance of payment.”

The IPR’s whitepaper, however, said workers remittance has stabilised, while foreign direct investment has modestly grown and is well below government’s estimates.