The
Federal Budget for fiscal 2013-14 includes considerable changes in both
expenditure and taxation plans, as well as ambitious targets that will have a
momentous effect on the external sector of the economy. However, a most
worrisome problem lingers on – that of rising external debt, coupled with
minimal foreign exchange reserves. Not only will these exert downward pressure
on the rupee, debt servicing costs will also balloon as a result to almost
unsustainable levels.
In
order to avoid a total collapse of the economy due to an extremely weak
currency and the inability to meet external debt obligations, the government
must devise a policy to address the issue at the earliest. It must chalk out a
strategy for the rescheduling of external debts other than International
Monetary Fund (IMF) loans, which cannot be delayed or rescheduled, and it must
enter into negotiations with lenders to delay debt repayments in the interest
of Pakistan’s already battered and bruised economy.
In
his budget speech, the finance minister announced the continuation of some, and
the initiation of other major infrastructure projects. The construction of the
various highway projects announced will require the import of various
large-scale machinery, equipment and raw materials. Locomotives, construction
of railway tracks, and the modernisation of communication links for Pakistan
Railway will also increase the country’s import bill. Once completed, however,
these projects will facilitate trade by reducing the time and cost of
transporting exportable items to sea ports and border trading routes on one
hand, and of transporting imported goods to local markets on the other.
The
government also plans on setting up Export Promotion Zones and industrial
estates to inject investment into the industrial sector. Special Economic Zones
(SEZs) will be set up, especially one at Gawadar, to provide incentives to
traders; thereby giving a much-needed impetus to the growth of trade and
commerce.
These
policies, if implemented properly, will have a beneficial impact on the balance
of trade, since semi-manufactured and finished goods can be exported at
significantly lower costs. The finance minister has also proposed an exemption
certificate for the import of raw materials by the manufacturing sector, which
will again be favourable to export-oriented industries.
The
much-criticised one percentage point increase in the General Sales Tax (GST)
will undoubtedly have an immense inflationary impact. It remains to be seen
whether the increase in prices it causes will affect the cost of production,
making exports uncompetitive in global markets, or whether it will restrict
imports of finished goods due to an increase in their prices. Some finished
imported goods have also been taken out of the reduced Federal Excise Duty
(FED) regime, which will have a beneficial impact on the country’s balance of
trade.
The
FED has also been levied on imported edible oil and canola seed, again
restricting their demand and reducing Pakistan’s import bill. However, this
could have an inflationary impact, since the cost of raw materials for cooking
oil manufacturers will increase.
Solar
and wind powered electricity producing machinery and energy conserving devices
will contribute to imports, since these are now duty exempt. To encourage the
use of hybrid and energy efficient cars, customs duties levied on them have
also been decreased. However, this will decrease the oil import bill of the
country, and would therefore have a favourable balance of payment effect –
provided a demand for these energy efficient cars is created in the local consumer
market.
As
part of the government's austerity measures, the expenditure of the Prime
Minister house has been reduced by over 40%, and the amount of government
ministries has also been decreased. This, in turn, means less spending on the
security of ministers and a fall in the import of bulletproof vehicles and
other security gadgets. Side by side, customs duty and other taxes have been
levied on the import of luxury vehicles by VVIPs for personal use. All these
measures, taken under the umbrella of a government-run austerity drive, will
decrease the import of luxury items. Besides, they will also bolster the
government’s intention of reducing the budget deficit.
Like
all economic policies, reforms proposed under the federal budget will take time
to produce results. A bright sign, however, is that the government has come up
with a set of long-term economic reforms to be implemented in stages, where
their effects can be gauged frequently in order to fine-tune the economy and
put it on a path leading to growth and development.
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