Analysis: a balanced budget

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-File Photo


Whichever way you parse it, the PML-N government’s fifth-consecutive budget looks balanced. On one hand, there is sharp focus on farming sectors, and to some extent exporting sectors as well.

On the other hand, infrastructure spending is at the heart of the presumably last budget under PMLN this term. Governments are used to deploying budgetary measures as marketing tools, or to win an election. Next year an election is due. And we do see Bata marketing approach. Ambitious targets for PSDP spending as well as agriculture finance reflect that.

The unusual, pre-budget plea by the opposition leader was well-addressed by Dar as he cited a number of relief measures for farmers. Good news is that the subsidies somehow seem targeted towards small farmers.

In the industrial sector, the relief provided last year to textile and other exporting sectors , in terms of zero-rating, will continue. A promise has been made to release the pending refunds by the Independence Day. Announced under the PM’s package, the government must take the refunds issue seriously, for an export-to-GDP ratio below 7 percent is too low. And to get it back to 12 percent by 2023 would mean exports have to cross $50 billion from existing $21-22 billion in five years!

Dar has also provided some reliefs for poor- and low-income groups. Some of the measures for the poor include higher budgets for the BISP and Bait-ul-Mal institutions in FY18. For the low income, the government-backed credit guarantees will be issued to give creditors comfort in financing low-income housing. There has also been an increase in minimum wage; there are reduced FED and WHT rates for telecom users; and the threshold of advance income tax has been doubled for FY18 to Rs 1 million.

Now, moving on to the unsatisfactory stuff, there was little for the middle class. In his speech, Dar used ‘poverty’ nine times while ‘middle class’ was mentioned only once. Higher FEDs on cement and steel would make construction dearer. Irony is that Dar is increasing the FED on the premise that cement sector is registering substantial growth. One wonders when the sector is just doing great and is competitive, why is the government not abolishing 20 percent import duty to generate some consumer surplus?

For probably the first time, Dar has mentioned access-to-finance for SMEs. That access is too low relative to peer economies. Now the package of Rs 3.5 billion plus Rs 0.5 billion is way too low. Anyway, the healthy sign is mentioning of the sector. The need is to push SME financing the same way as agriculture credit targets are emphasised.

On to the macro fundamentals, the prime responsibility of Dar is to bring fiscal discipline. Here numbers seem to be overstated. The provisional budget deficit for FY17 is claimed at 4.2 percent while the nine-month deficit was 3.7 percent at GDP of Rs 33.5 trillion. However, the GDP is revised down to Rs 31.8 trillion making nine month deficit to stand at 3.9 percent. How can the government realistically add just 30 basis points to the deficit in the last quarter?

Next year, the target of 4.1 percent fiscal deficit is too optimistic as well, given the highest-ever development spending both by federal government and provincial counterparts. There is not much on new taxes to meet an optimistic growth of 14 percent in FBR revenues over revised targets of this year. Similar is the story on non-tax revenues. There is nothing new; be it PMLN or any other party’s government, the tradition is to announce targets which are next to impossible to meet.

Dar being the first Pakistani finance minister to announce fifth-consecutive budget got him overwhelmed in his speech. He reiterated the need for a Charter of Economy, but truth is that the actions of PMLN in the past four years undercut his argument for an economic consensus over next five years.

In his self-praise, he took the claim of taking the economy out of the woods because of PML-N’s prudent policies. That’s’ highly debatable. It is the windfall of low commodity prices plus the pile of foreign debt the government issued in the past four years which primarily explain the stable macros. The external debt of the country increased from $60.9 billion in June 2013 to $74.1 billion in December 2016. Against that increase of $14.2 billion, the foreign exchange reserves are up by $11.5 billion in the same fourteen quarters. This makes the external scorecard negative.

The charter of economy he professed is rooted in the need to take economic growth north of 7 percent per annum for the five years beyond 2018. (The FY18 target is 6 percent.) But that will need to be underpinned by good governance. In that context, it is ironic that Dar talked about investment and competition but is having his close aides, who don’t have requisite experience, running key economic and regulatory institutions. Dar emphasised on good governance and public sector entities reforms.

But how much of privatisation or corporatization of PSEs have been done in the last four years? Actions speak louder than words, sir. And please do not confuse the prediction of PwC for Pakistan to join the ranks of G20 by 2030. The report said that nominal economy would grow to $750 billion plus by 2030; but for a population of 250 million plus by then, it may remain, at best, as an emerging economy.-Business Recorder

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