Federal Finance Minister Ishaq Dar, as expected, presented an election-year oriented budget for the fiscal year 2017-18 (July-June). The budget is big on promises, but again failed to introduce the much-needed and oft-delayed reforms to address the structural problems of Pakistan’s debt-burdened economy.
As usual, the budget speech set improbable targets and ignored any assessment of the past four years, which are riddled by policy failures and weaknesses of the government.
As predicted by several independent economists, the new budget – like the previous ones presented by Dar – did not give any mid to long-term economic vision or strategy for the country.
But why would we expect anything different from Dar, who on May 26, read out the final budget speech of the five-year term of the Pakistan Muslim League (Nawaz) government in the Parliament?
Given the PML-N government’s penchant for creating an illusion about the country’s economic revival, it would be extremely naïve to imagine that Dar could critically review past policies.
It was inevitable that the PML-N’s financial czar would continue to manage the economy the way he always has for his political boss; by playing with numbers, piling up a record public debt, ignoring failures and sticking to stopgap measures, which have made Pakistan’s economy more vulnerable than ever before.
The fiscal year 2017-18 budget sets unrealistic targets and is designed to enable the government to dole out money to its candidates in select constituencies in the name of development in the upcoming election year.
Let’s review two basic budgetary targets – revenue collection and the Public Sector Development Plan (PSDP) – set at Rs. 4,013 billion and Rs. 1,001 billion respectively.
The fiscal year 2017-18 budget sets unrealistic targets and is designed to enable the government to dole out money to its candidates in select constituencies
The revenue collection target at Rs. 4,013 billion for 2017-18 is 14 percent higher than the revised Rs. 3,521 billion target for the outgoing fiscal year. Originally, the government set this target at Rs. 3,621 billion in the 2016-17 budget. But it was revised downward after the Federal Board of Revenue (FBR) insisted that lower oil prices would result in lower tax collection.
In the first ten months of the outgoing fiscal year, the FBR collected Rs. 2,519 billion against Rs. 2,346 billion a year ago – showing a 7.35 percent growth in revenue collection. Yet, in May and June – the last two months of the fiscal year – the tax body will have to collect Rs. 1,002 billion, or show 31 percent growth, compared to the same period a year before when it raised Rs. 766 billion, if it aims to achieve the revised revenue target.
This appears an impossible task. Experts believe that the FBR – at the most – would collect no more than Rs. 3,300 billion in revenue by the end of June 2017, against the Rs. 3,521 billion revised target if, as per Dar’s infamous practices, it takes massive advances and stops refunds.
So if the base of revenue collection is estimated at Rs. 3,300 billion for 2016-17, the FBR will have to show a staggering 22 percent growth in revenue collection if 2017-18 budget’s revenue target of Rs. 4,013 billion has to be met.
But this again seems beyond reach because Dar has again refrained from imposing any new taxes, expanding the tax base or introducing reforms in the tax collecting machinery in the new budget.
Shabbar Zaidi, a leading tax expert, said that Pakistan’s revenue collection remains overwhelmingly dependent on imports. “If a country’s import bill is hovering at around $45 billion or so, then Sales Tax, Customs Duty and the Withholding Tax help to raise the big chunk of revenues.”
In dollar terms, Pakistan’s import bill has shot up by 15.5 percent, which is reflected in the overall revenue collection figure, he said.
In 2016-17, there has been a drop in collection from direct tax and non-tax sources. The non-tax sources include money received from the Coalition Support Fund, privatisation proceeds and the State Bank of Pakistan’s profits.
The only saving grace for the government has been an increase in the collection of oppressive indirect taxes, which hurt the poor, as well as low and middle-income groups.
Similarly, the government allocated Rs. 1,001 billion for the PSDP – a record increase of 40 percent – in the new budget, while it earmarked Rs. 1,112 billion for the provincial annual programmes, which is 37 percent higher compared to the outgoing year.
The provincial governments of Sindh and Balochistan are the biggest culprits followed by Punjab in the non-utilisation of development funds
The trouble lies in the fact that the development fund utilisation – both at the centre and in the provinces – remains below their annual targets. The federal government allocated Rs. 800 billion PDSP in 2016-17, but would be able to spend around Rs. 700 billion by end-June, including the amounts released but not actually spent.
The capacity of provinces to utilise development funds is even more dismal. In the fiscal year 2016-17, the Annual Development Programme for the four provinces was around Rs. 875 billion, but in the first nine months (July- March), they utilised only Rs. 422 billion, or 48 percent, of the total amount. The provincial governments of Sindh and Balochistan are the biggest culprits followed by Punjab in the non-utilisation of development funds.
Therefore, should 2017-18’s record-high PSDP be taken seriously? Has the government got the means to make Rs. 1,001 billion available for development? Has it got the capacity and ability to spend it in a judicious, fair and transparent manner – if by chance the funds are available? If the past is any guide, then the answer to these questions is “no.”
As far as making announcements are concerned, Dar could have doubled the PSDP to Rs. 2,002 billion, but “if wishes were horses, beggars would ride.” The government neither has the resources to generate this amount, nor the capacity to use it.
Higher growth, really?
For the next fiscal year, Dar targets economic growth at 6.0 percent and claims that in 2016-17, Pakistan achieved the feat of 5.3 percent growth – the highest in a decade – though missing the target of 5.7 percent. But leading economists remain skeptical.
One of Pakistan’s eminent economists and a former finance minister, Dr. Abdul Hafiz Pasha challenges the government’s 5.3 percent growth figure and says that the economy grew by not more than 4.4 percent.
Dr. Pasha in an article, carried by daily ‘Business Recorder’ on May 27, argues that the 2016-17 growth figures defy historical patterns. Quoting official figures, he argues that all the major sectors underperformed compared to the government’s growth figure of 5.3 percent.
These include large-scale manufacturing at 4.9 percent and electricity generation at 4.5 percent, while exports shrank by 2.0 percent in the first 10 months of 2016-17.
“Therefore, either Pakistan has discovered a new way of achieving high growth or there are serious grounds for questioning the growth estimate by the Pakistan Business Survey for 2016-17,” writes Dr. Pasha.
Several other targets – necessary to achieve 5.3 percent growth – have also been missed including a strong recovery of the cotton crop back to the peak of 14 million bales attained in 2014-15. Instead, the estimated output is short by over three million bales.
Official data shows that investment grew by less than 8.0 percent despite the China Pakistan Economic Corridor project. This was because of 15 percent lower spending in the PSDP and 38 percent lower foreign direct investment than projected.
Finance ministry sources say that Dar has been resorting to his “old tricks” of fudging the numbers, changing the data benchmarks and celebrating even when he misses economic targets.
While Dar wants the world to believe that under his command the economy is marching forward, major economic indicators tells the story of a deepening economic crisis.
Since the PML-N came to power in 2013, Pakistan’s exports declined by more than 25 percent, sliding to $20.7 billion in 2015-16 from the highs of $25.1 billion. In the first eleven months of the current fiscal year, exports were at $18.54 billion compared to $19.14 billion during the same period a year ago, showing that the decline continues.
Overall, Pakistan’s trade deficit has widened to a record $30 billion, or by 42 percent, in the first 11 months of 2016-17 despite relatively lower oil prices. This makes Pakistan’s economy a little more vulnerable to external shocks.
The government’s reluctance to introduce reforms stems from the fact that it wants to protect various interest groups
Pakistan’s current account deficit has also swelled to $7.25 billion in nine months compared to $2.5 billion during the same period in 2015-16. The government concedes that it will rise by another $1.0 billion by June 30 because of the widening trade deficit and declining remittances, which during July-May fell 2.13 percent to $17.46 billion.
The rising public debt, which has crossed the Rs. 20 trillion mark, is also ominous for Pakistan as debt servicing remains its biggest expenditure. All these negative factors make Pakistan’s economy prone to the balance of payment crisis.
The PML-N government has also miserably failed to revive the confidence of foreign and local investors. Despite the CPEC inflows, Foreign Direct Investment, though almost doubling to $1.73 billion up to April compared to the last year’s $800 million, remains much below the highs of $5.27 billion in 2007-08.
The biggest reason for the poor economic performance is the government’s lack of will in implementing reforms to generate more revenues by expanding the tax base or overhauling State-run institutions and key sectors responsible for an unending financial hemorrhage. The government also did not take any meaningful austerity measures.
The government’s reluctance to introduce reforms stems from the fact that it wants to protect various interest groups, including traders, shopkeepers, big businesses and landowners – comprising the government’s mainstay and support base.
As a result, Pakistan’s economy is in worse shape than it was a decade ago. The fudging of numbers, big promises and creating illusions of an economic turnaround by Dar & Co. cannot alter the fact that Pakistan’s economy is again at the brink of a balance of payment crisis and economic meltdown.
Signs of economic gloom and doom are obvious; the unsustainable debt burden, shrinking exports and remittances, the widening trade and current account deficits and foreign and domestic investors’ reluctance to bet on Pakistan. Surely the PML-N stalwarts must see the writing on the wall.