WEB DESK: Compared to the GDP growth of 4.7 percent (or is it 4.2 percent?) in FY16, planners of the FY17 federal budget envisage GDP growth of 5.7 percent hoping that the output of agriculture will rise by 3.48 percent, industry by 7.69 percent and services by 5.73 percent – all subject to requisite energy supply, normal climatic conditions, adequate forex reserves, positive investor sentiment, and political stability.
Of these pre-conditions subject to which the planners consider these targets “achievable”, one that certainly won’t be met is “requisite” power supply. With the government promising zero power load-shedding only after March 2018, fulfilling this pre-condition is unlikely, although besides maladministration and political instability, this the key disincentive for investment.
As for political instability, rejection of the Terms of Reference (for the Judicial Commission to investigate the Panama Leaks) proposed by members of the opposition in the parliamentary committee tasked with finalising the Terms of Reference and the expected arrival of Allama Tahir-ul-Qadri on the political scene promises escalating the current political instability. The medical treatment of the Prime Minister foretells his prolonged absence from office, which is raising questions about legality of finalisation of the Federal Budget FY17, and administrative and defence-related decisions that may be taken in his absence.
The PML-N leadership hasn’t yet devised a strategy to avoid the likely constitutional crises on these issues. That’s not all; the Kulbhushan affair, Mullah Akhtar Mansour’s assassination by the US inside Pakistan, capture of the agents of Afghan National Directorate of Security, umpteenth repetition of the US demand to ‘do more’ for containing terrorism (including assisting India in investigating the Bombay tragedy), is shifting the focus away from the economic crisis Pakistan confronts.
As for climatic conditions, heavy rains in the Punjab and KPK and a severe drought in Sindh and southern Balochistan have already damaged crops, which may force additional imports to meet the shortfalls created by crop losses – principally cotton – which will adversely affect Pakistan’s textile sector that fetches the largest share of export proceeds. Given the multifarious uncertainties these developments have created, as of now, achieving the GDP growth target of 5.7 percent appears unlikely and dilutes the possibility of exports rising to $24.7bn level, imports being limited to $45.2 billion, trade deficit not exceeding $20 billion, and the current account deficit staying below $4.8 billion against its $1.7 billion level in FY16.
This mix of uncertainties foretells fiscal stress and fresh domestic and external borrowing to service the existing debt, possible depreciation of the rupee, and consequent rise in inflation beyond its targeted 6 percent level. Besides, the Finance Minister also doesn’t realise that, for too long, Pakistan has repaid its public debt by acquiring fresh debt. The PML-N regime inherited domestic debt of Rs 14.3 trillion and by December 2015 increased it to Rs 18.85 trillion. Similarly, in December 2015, external debt shot up from $60.9 billion to an alarming level of $68.5 billion.
According to the data released by the Economic Affairs Division, by May 2016 fresh external debt also exceeded $1.4 billion against its target of $200 million in the FY16 budget. He is optimistic about further rise in inward remittances by Pakistanis working abroad although the opposite is likely. An indicator thereof is that remittances by Indians working abroad (which used to fund 50 percent of India’s trade deficit) slumped by 27 percent in the fiscal year ending in February 2016 because fiscally strained the Persian Gulf states are now laying-off foreign workers.
Indications are that the Budget FY17 will focus on increasing the federal revenue by Rs 1 trillion and given the sustained failure to expand the tax net to collect progressively higher amounts of direct taxes, bulk of this increase will comprise more/higher indirect taxes and subsidy cuts/withdrawals – actions that could be justified only by infrastructure development that cut the cost of doing business.
The failure to up-grade/expand the physical infrastructure to cut the cost of doing business is reflected in the daily advertisements issued by trade associations lamenting their miseries rooted in infrastructure gaps because, to contain the fiscal deficit, until May 2016 only 68 percent of the funds provided in the Federal Budget-FY16 for Public Sector Development Plans were disbursed while current expenses exceeded their target. Yet, the projections for FY17 don’t reveal the strategy for reducing current expenditure, which is imperative if the virtually criminal practice of slashing the development outlay for reducing the fiscal deficit is to be shunned.
Nor do the projections define a clear strategy for speeding-up the privatisation of loss-making state-owned enterprises, which was promised back in June 2013. Pakistan’s long-running tragedy has been the steady depreciation of the rupee, which prevented modernisation and replacement of its industrial base; consequently, Pakistan can export only low value-added goods, but even sectors that have this capacity are being throttled by reckless acts like withholding their tax refunds to reduce the fiscal deficit.
Talking of sectors wherein comparative cost advantages could be enhanced to materialise their potential, Pakistan is the 5th largest producer of milk but produces minimal quantities of value-added milk products. Also, it is the 6th largest producer of fruits but nearly 30% of the annual crop rots. Reason: it lacks adequate capacity for preserving and processing them. For higher output of processed fruit, dairy, and seafood products, we need cold chains – specialised transport networks to move them in healthy condition to processing plants for value-addition, and export of their surplus.
Fisheries, hatchery and animal husbandry sectors too require expanding because they have huge potential for employing the rising population of uneducated youth. While developing the infrastructure for fruit, milk and seafood processing sectors is vitally important, dairy farming practices too need improvement in their capacity for producing up-graded animal food, setting-up country-wide chains of veterinary clinics, and availability of veterinary medicines and instrument – steps that could increase meat exports. Instead of helping these sectors realise their potential, rumours are that they may be burdened with extra taxes.
What the ordinary find equally baffling is the low priority assigned to exploration of the huge mineral deposits of gas, iron and copper, to boost the industrial sector whose slowdown is increasing unemployment, and of gold, that can strengthen the rupee.
Falling competitiveness of the export sector can be compensated partly by exporting to the neighbouring countries since the landed cost of goods there will have the lowest transportation cost component. While potential of trade with India can’t be optimised due to ongoing Indo-Pak tensions, after lifting of economic sanctions, Iran with a huge deficit in consumer goods production can be a big export market.
Instead of using the oil price for collecting higher taxes, lowering it and plugging the supply-demand gap in the power sector can allow the industry to operate at least at the break-even level to partly regain its sliding competitiveness. With very low transport cost, landed cost of the goods exported to neighbouring countries could become truly competitive. But none in the government is bothered about materialising these advantages.-Business Recorder