Budget
discussions in the parliament reveal that the government is aware of the public
discontent over its financial plans. In my opinion, the budget will equally
hurt the people and the government, but I acknowledge that it would not have
been any different if it were presented by a PTI or a PPP government. The PML-N
leadership is feeling the heat because it had raised the expectations of its
supporters of "economic miracles" during its election campaign.
Pakistan
is an energy-starved economy with almost 10 percent fiscal deficit, persistent
current account deficit, alarmingly low level of foreign exchange reserves,
disappointing tax to GDP ratio, and low levels of investment and savings to GDP
ratios. These macroeconomic realities hardly leave any fiscal cushion for the
government to be innovative or to take popular measures. To some extent, this
argument can be applied to the last five budgets presented by the PPP as well. Despite
a downward revision, the FBR could not achieve its revenue target.
Manifestation of mal-governance - chronically ill Public Sector Enterprises,
crippling energy sector subsidies, the power sector circular debt, less than
budgeted external assistance, and non-realization of plans such as income from
the auction of 3G licenses - resulted in a huge fiscal deficit during 2012-13.
Most of this deficit will spill over to the next fiscal year, making it
difficult for the PML-N government to bridge the budgetary deficit of Rs 1,671
trillion (including Rs 20 billion for a 10 percent increase in federal
employees' salaries). Against the federal revenue of Rs 1,918 billion, the
government has proposed expenditures of 3,611 billion, leading to a shortfall
of 45 percent. This shortfall will soar because the provinces have also
presented deficit budgets, further complicating the economic problems in
Islamabad.
There
are two types of expenditures - current expenditures and the Public Sector
Development Program (PSDP). Current expenditures include interest payments,
pensions, defence affairs and services, subsidies, and the running of the civil
government. The Public Sector Development Program caters to the development
agenda.
Interest payments, defence services, and the running of the civil government
cannot be curtailed. These three make more than 75 percent of the federal
expenditures (which are 20 percent higher than the total federal revenue). It
simply implies that the PSDP and parts of the current expenditure would have to
be financed both by external and domestic borrowing.
The
budget document reveals that the government is planning to borrow $5.7 billion
from external sources and Rs 1.48 trillion from domestic financing (mainly
through commercial banks and public debt). Any external or internal shock would
not only increase the need and volume of the loans, but also worsen the
economic structural imbalances. So what is the possible way out?
An
IMF post program monitoring mission is already due in Islamabad. Due to severe
economic vulnerabilities, the government has indicated that it will negotiate a
bailout package. However, the Fund would be reluctant to offer one until the
new government takes some meaningful measures for structural reforms. Partly
due to its allies, especially the MQM and the JUI-F, the PPP government could
not fulfill its commitments with the Fund on the documentation of the economy,
General Sales Tax (GST) reforms, power sector reforms, and Public Sector
Enterprises reforms. It is in this context that the federal budget was preponed
and Ishaq Dar approved all measures which could be sold to the visiting IMF
mission as Pakistan's "front loading" on reform agenda.
All
forms of "adjustment taxes" proposed in the federal budget will help
in the documentation of the economy, and people will be encouraged to register
with the FBR. Likewise, an increase in the GST to 17 percent is PML-N's
commitment to GST reforms. The government may not stick to subsidy reduction
due to political compulsions, but it has announced the withdrawal of
non-targeted energy subsidy and has already increased the power tariffs to
reduce the circular debt. It has also announced major reforms in Public Sector
Enterprises (PSEs) and plans to either privatize them or run them through
public-private partnerships. The continuation of the Benazir Income Support
Program (BISP) - with a new name - will also suffice IMF's prerequisite of
having strong social safety nets to mitigate the adverse effects of structural
reforms.
IMF
or no IMF, these measures will help put Pakistan's economy back on track in the
medium to long run. These surgical measures are extremely painful but are
essential for curing our bleeding economy. But the pain of this treatment
should not be life threatening for the masses and that is where social safety
nets are extremely crucial. The PML-N has been criticizing the political misuse
of BISP by the PPP. It remains to be seen how smartly the PML-N handles the
program.
The
privatization of PSEs or running them through public-private partnerships will
not fulfill the purpose unless regulatory bodies are strengthened and
depoliticized. Turning Pakistan Railways into a corporation would not
automatically resolve its issues, unless we learn lessons from the failure of
another corporation, the PIAC. Putting the right persons in the right jobs,
especially in the boards of directors, is of utmost importance.
On
the energy front, the government would have to raise Rs 500 billion through
T-bills (public debt) to clear the circular debt backlog. However, the circular
debt will not be controlled until we start allocating fuel to efficient
generation plants (independent power producer are three times more efficient
than government generation companies), minimize transmission and distribution
losses, and in the long run change the fuel mix for electricity generation.
Fortunately, these steps don't require a lot of money, only strong political
will for energy governance reforms.
After the new NFC Award, there is a significant increase in the share of the
provinces. Almost 58 percent of the federal divisible pool now goes to the
provinces. However, the provincial tax to GDP ratio is still less than 0.5
percent. To me, the provincial budgets were a test of the PML-N, the PPP, and
the PTI's resolve to reduce Pakistan's economic vulnerabilities. Unfortunately,
all three provinces presented deficit budgets (Balochistan had not presented
its budget at the time this essay was written). None of them seems serious in
improving the provincial tax to GDP ratio. This fiscal irresponsibility of the
provinces will increase the economic miseries of the federal government. These
miseries can only be resolved through political wisdom.
The
PML-N government may not be very successful in bridging the fiscal deficit in the
short to medium run. It cannot reduce power or gas tariffs through the budget,
because power tariff determination lies with NEPRA, and that of oil and gas
with OGRA. But the government can certainly win back the trust of the people
and the international community through transparency and accountability. This
is where a new parliament can make a difference.
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