A roadmap to nowhere

Is the budget 2020-21 realistic or just a collection of figures? Is it the growth budget people were expecting?

Despite the abysmal economic situation, the federal government once again sets highly optimistic monetary targets for the next financial year.

On June 12, the federal government announced its Rs 7.137 trillion budget for the year 2020-2021, with a deficit of Rs 3.437 trillion, which comes to around seven per cent of the gross domestic product (GDP).

After adjustment of an estimated surplus of Rs 242 billion, the budget deficit comes to Rs 3.195 trillion.

Like always, the expenditures side is under severe pressure as debt servicing and defence consume most of the revenues expected to be collected by the government.

This year, the debt-servicing is estimated at Rs 2.946 trillion, which is around 41 percent of the budget.

Similarly, the amount proposed for defence spending is Rs 1.289 trillion which is equal to 18 per cent of the budget. These are the two heads under which the expenditures have seen an increase over the last year whereas in all others the spending has come down.

The other main features are that the proposed budget for running the civilian government is Rs 476 billion for the next year; for subsidies there is only Rs 210 billion; for payment of pensions Rs 470 billion and for Public Sector Development Programme (PSDP) Rs 650 billion.

Subsidies have been cut down by 48 per cent. Rs 70 billion has been allocated for coronavirus-related initiatives. Ehsaas programme will get Rs 208 billion.

Surprisingly, the government has set some highly ambitious targets that it aims to achieve during this year.

For example, the budget document states that the economy will recover from negative growth of 0.4 per cent to 2.1 per cent of the GDP; the current account deficit will be maintained at $4.4 billion; inflation will be reduced from 9.1 per cent to 6.5 per cent and foreign direct investment (FDI) will rise by 25 per cent.

Dr Abdul Hafeez Sheikh, the PM’s Adviser on Finance and Revenue, linked success on these counts to the coronavirus situation in the country.

If the situation improved and came under control, there will be economic revival. However, if the situation worsens and there are lockdowns things will be otherwise.

In a post-budget press conference, he said: “It is not a budget of the 19th Century. It’s an evolving document that can be adjusted in line with ground realities.”

Several analysts have called this budget a document prepared under the guidance of the International Monetary Fund (IMF), pointing to the federal government’s freeze on salaries and pensions of government employees.

The Fund has extend an Economic Enhancement Facility (EEF) to Pakistan, which is in abeyance because of the coronavirus crisis. It is likely to be restored if certain targets are achieved.

They point out that certain allocations in the budget are quite close to the ones suggested by the IMF. The salaries of the government employees have also not been raised to bring down the expenditure and budget deficit.

The analysts think that the government might later revise the figures and seeks waivers from the IMF as many of the targets are unrealistic.

The opposition and critics say the government seems to have used the coronavirus situation to cover up the problems of the Rs 3.8 trillion budget deficit, the largest in Pakistan’s history, and avoid taking responsibility for the economic downturn.

Minister for Industries Hammad Azhar brought this issue to the attention of the parliamentarians during the budget speech. “Initially conceived as a health challenge, coronavirus turned out to be an economic threat having the potential of destabilizing the international economic system. Pakistan was no exception. Coronavirus drastically changed the whole scenario and results of our hard work were swept away.”

He added that a protracted lock down, business closures, travel bans and social distancing resulted in slowing down of economic activities, thus negatively impacting the growth patterns, fiscal and current account projections and investments. Economic growth declined by Rs 3,300 billion which brought GDP growth down from projected 3.3 per cent to -0.4 per cent.

The budget document states that the economy will recover from a negative growth of 0.4 per cent to 2.1 per cent of the GDP; the current account deficit will be maintained at $4.4 billion; inflation will be reduced from 9.1 per cent to 6.5 per cent and foreign direct investment (FDI) will rise by 25 per cent.

To make matters worse, swarms of locusts have attacked many districts. There is a need to tackle this menace as well in order to save agricultural production from destruction.

Talking to The News on Sunday (TNS), Nauman Kabir, the Pakistan Industrial and Traders’ Associations’ Front (PIAF) chairman, says this year’s budget is a survival budget. “This is not the growth budget we were expecting. How will the country be able to achieve a 2.1 percent growth target after the economy has contracted by 0.4 percent? It seems very unrealistic that revenue target has been increased by 27 percent, when the economy is in trouble. There will likely be a review of the targets; this may be done through a mini budget.”

He says the federal government has not raised the salaries of its employees against which protests have already started. “The government might come under pressure and rethink its decision. This is quite relevant,” he says, in view of the fact that Sindh government has raised salaries of its employees.

Kabir says a good thing about the budget is that duties on machinery and raw material have been reduced to one percent and zero percent, respectively, from the previous 5 per cent each.

“The government has also announced an increase in the powers of Alternative Dispute Resolution Committees (ADRC), which is a welcome step, as this will facilitate businesses opting for out-of-court settlements.”

He urged the government to facilitate the exports sector and agriculture. “Pakistan’s economic growth depends overwhelmingly on these sectors. Allocations for agricultural research and development of hybrid seeds is what we need the most at this time,” he adds.

Requesting anonymity, a Finance Ministry official said that there was some disagreement over budget preparation. “Perhaps, that is why it was presented by the minister for industries and not the finance minister. The revenue target has been set at Rs 6,573 billion, out of which Rs 4,963 billion is to be collected by the Federal Board of Revenue. The remaining Rs 1,610 billion will be non-tax revenue that will mostly be obtained through borrowing from domestic banks and bilateral and multilateral foreign lenders. This means the domestic banks will mostly be serving the government and not have much liquidity to offer to the business and industry,” he adds.

He says the fact that the privatisation proceeds are estimated at only Rs 100 billion shows that the government’s privatisation plan is not very aggressive though they have been talking about privatization of 43 state-owned entities.

Higher education and health allocations appear inadequate but it can be argued that these are provincial subjects.

The allocation for Higher Education Commission (HEC) has been increased from Rs 59 billion in 2019-20 to Rs 64 billion. Rs 13 billion have been allocated for the Ministry of National Health Services for federal government hospitals located in Sindh and the Punjab.

Economist Asad Sayeed says the targets are quite unrealistic. He also says the budget has been drafted as if the pandemic is a thing of the past and that over the coming year, the government will have to deal only with its after-affects.

“The growth target does not factor in the effect of Covid-19 as a continuing phenomenon in FY-21. If supply and demand disruptions continue the way they are happening right now, the likelihood of growth in the coming year will be severely compromised.”

“The rest of the world has incorporated this reality into their projections. Most countries have projected negative growth, at least for the first half of FY21. The revenue target is not realistic either. There is no path by which to get there. They will be lucky if even 50 per cent of it is achieved. This is particularly sinister since the provinces have to conduct their budgeting on the basis of federal government revenue figures. The budget deficit target is over optimistic. If both growth and revenue targets cannot be met, the deficit will far exceed the targeted 7 per cent of the GDP.”

Sayeed says pharmaceuticals, sanitary and related sectors will do well. “Food processing may also do better. However, most others sector will suffer. There is a lot of talk about construction, but with low demand in the coming year for housing, the sector will not benefit. However, file pushers and real estate agents can do well with tax breaks and amnesties given to them. All other sectors will suffer,” he says.

“Our hopes are pinned on the agriculture sector. This will be contingent mainly on the locust situation - if it is contained, then agriculture may post positive growth. Services and manufacturing will most likely remain negative.”

About debt payments, he says relief from lenders has already been announced. “There may be more bilateral aid that comes Pakistan’s way,” he says.

Economist Dr Kaiser Bengali says the budget is just a collection of figures and the government has not taken into account the structural changes that have taken place in economies due to coronavirus. “The agreement with the IMF has become irrelevant due to changed dynamics, but the budget has been made on the same lines. The revenue target is too high and the expenditures have not come down,” he concludes.


The author is a staff  reporter and can be reached at  [email protected]

A roadmap to nowhere: Is the budget 2020-21 realistic or just a collection of figures?