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Opinion

Economic notes

May 1, 2018
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Ignoring economic challenges

Opinion

Economic notes

May 1, 2018

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There were numerous voices advising the government to not present Budget 2018-19, as it was for the next government to do so. However, in all its wisdom, the incumbent PML-N government decided to present the budget in the National Assembly. Let’s analyse if the budget, which will come into effect after the present government is out of office, will serve any useful purpose.

It needs to be emphasised that this budget is about six weeks ahead of the normal schedule. Past budgets were announced between the dates of June 5 and 12. The full picture of the economic performance during the current year, and that of the on-going budget, was not available to the budget-makers. Therefore, it is an awkward budget that is not comparable with the information available to all previous budgets. The data in the Economic Survey is also based on shorter intervals (six to eight months) compared to its normal duration. With such critical inputs missing, the new budget is bound to not be based on realistic assessment of the imperatives facing the economy.

Pakistan’s economy is passing through an enigmatic phase. On the one hand, we have a booming economy (growth of 5.8 percent; highest in 13 years), solid price stability (average inflation during July to March was 3.8 percent), unprecedented increase in the availability of credit to the private sector. Last fiscal year, the credit available was the highest in the country’s history at Rs748 billion; this fiscal year, until April 20, it had reached Rs458 billion, higher than it was on this date last year. Other economic factors include rising investments (16.4 percent of GDP) and strong, robust consumer spending.

On the other hand, the above picture is sharply contrasted with the vulnerabilities facing the economy on the external front, where the current account deficit is all set to cross five percent of GDP, and there is no chance of it slowing down. SBP reserves have been depleting rapidly since October 2016 (declining from $20 billion to $10.5 billion at present). More significantly, during this period the country has contracted additional debt of more than $13 billion, with the net external debt outstanding at $70 billion.

Finally, let us note that the external account imbalance is the mirror image of the fiscal balance, which has been facing sustained and rising deficit since the last fiscal year. Accordingly, any budget that aims to stabilise the economy would address the most immediate problem of runaway deficit threatening to unravel the economy.

Viewed in this background, we find that the budget has failed to address this key challenge of containing the deficit. In fact, unlike in the past, economic managers spared themselves from even emphasising its containment as a goal of fiscal policy. Against an ostensible budget target of 4.9 percent of GDP (highest in the last four budgets), a number of revenue estimates are so soft that they can hardly be considered as serious sources of income. Accordingly, the underlying deficit is much higher than claimed in the budget.

The following arguments would establish this proposition. First, we note that the government is claiming that the deficit for the current year would be 5.5 percent against a budget target of 4.1 percent. However, it would be miraculous if it is contained at six percent. Even last year, the final number of 5.8 percent was made possible by some one-off revenue like proceeds from the sales of security printing press to SBP and an LNG power plant to Pakistan Development Fund, established from a grant from Saudi Arab. There is no reason to believe that the final outcome for the current year would be different than the seven percent underlying deficit of the last fiscal year.

Second, a number of holes in the budget estimates are visible on cursory examination. These include: (a) a provision of Rs286 billion as surplus from provinces when last year it was negative Rs164 billion (0.7 percent of GDP), is untenable; (b) a revenue provision of Rs300 billion on account of petroleum levy (an increase of Rs130 billion over the revised estimates for current year) is contingent on amending the law and subsequent decision to increase the existing rate (which is politically infeasible), yet the increased revenue has been built in the budget; (c) a budget provision from gas cess of Rs100 billion, when the revised target for the current year is Rs15 billion, is unrealistic, as nothing would be collected since the entire tax is mired in legal challenges; (d) there is also a shortfall in revenues of Rs100 billion on account of giving concessions of nearly Rs190 billion, whereas new tax measures would yield only Rs90 billion; and (e) an admitted expenditure not built in the budget is the impact of increase in pay and pension of Rs70 billion (which the minister reportedly dismissed as insignificant). These items add up to Rs586 billion, which is 1.5 percent of GDP. Therefore, the underlying deficit is 6.4 percent.

As we said earlier, Budget 2018-19 does not recognise fiscal indiscipline among the serious vulnerabilities facing the country. Not attacking fiscal deficit would inexorably push the economy towards a situation where the country would run out of reserves and find it difficult to meet its foreign obligations. The time for a populist budget, like the present one, has long gone. The government has not earned many points on account of showing seriousness towards the difficulties facing the economy.

When we shirk the responsibility of taking painful and unpopular decisions, as required by the importance of the situation, we only stop after reaching the precipice. That is when we seek outside help, and then take those decisions under duress. This is a deplorable state. In the last three decades, this is the seventh time that the country has reached a point where it is left with no option but to seek outside help. Help will come, but at a significant cost to the people and reputation of the country.

The writer is a former finance secretary. Email: [email protected]

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