Exclusive discussion with Dr. Ayub Mehar, Economist
PAGE had discussion with Dr. Ayub Mehar about the budget 2018-19. He termed it the Political Budget and talked about the growing debt in present scenario. Following are the excerpts of the discussion:
The upcoming budget will be the last budget of present government and will be presented and announced just before care taker set up when election campaign will be going to start. So it is quite expected that this budget will become a ‘Political Budget’. Though Finance Adviser has clearly mentioned that the upcoming budget will not be political but in the present circumstances it seems impossible. The inordinate increase in the amount of subsidies and transfer payments, increase in the salaries and benefits of public sector employees, allocation of higher funds in public sector development program (PSDP), introducing new avenues for tax exemptions and ‘lawful evasions’ and heavy deficit financing are the indicators of a political budget. While to finance the deficit government may decide to further raise in public debts (domestic and external) and increase in money supply by use of cash balance through the state bank. In these situations the further violation of the ‘Fiscal Responsibility and Debt Limitation Act 2005’ is quite expected. It is not only the matter of violation of the act legislated by the parliament, it will transfer the burden of debt to the future generations. In this case it is the duty of opposition parties and judiciary to take necessary actions to stop such violations and irrational decisions. Another possibility for the government to increase its vote bank is the transfer of resources and benefits to the common public at the cost of investors and business sector. It indicates the burden of further taxes on the business sector and investment activities to generate funds for spending on the common peoples. Obviously, such actions will promote ‘populism’ which mean to get support of the public at the cost of long-term planning and sustainable development.
One of the best solutions for the government to gain public support is to implement the recommendations which have been suggested by the FPCCI in its shadow budget and proposed fiscal policy in 2014. FPCCI had emphasized the shifting of tax policy from indirect to direct taxes. It was suggested to reduce the rate of GST at 7 percent which is even now is greater than the effective rate of sales tax. In nominal term FBR collect 17 percent GST but after repayments and several adjustments it becomes less than 7 percent. The lower GST rate not only will discourage the corruption in taxation system, it will also reduce inflation. It will also increase the buying power of common peoples and the demand for goods and services in the country which ultimately induce the investment activities, employment opportunities and GDP growth.
The outstanding debt of the country itself is not the biggest issue; the problem is the lack of fiscal resources to repay this debt. In absolute term the magnitude of Pakistan’s outstanding debt is lower than other developing countries. According to the report on debt’ statistics released by the World Bank, the total outstanding debt of Pakistan is 73 billion dollar, while this amount is 456 billion dollar for India and 405 billion dollar for Turkey. The outstanding debts of South Africa, Indonesia, Malaysia and majority of Latin American countries are greater than 400 billion dollars. However, their debt-to-GDP ratio and debt-to-export ratio are much lower than Pakistan, which indicate that they can manage the repayments without creating tax burden on the peoples. Another drastic indicator is the composition of this loan. The share of private sector in outstanding debt in Pakistan is less than 10 percent, which indicates that 90 percent debt burden was created by public sector, while in case of Turkey and India 50 percent debts belong to their private sectors. The debt to private sector means the acceleration of investment and productive activities in the country which generate employment opportunities and contribute in growth of GDP, while debt for public sector does not provide such effective utilization for the purpose of economic growth and investment activities because of inefficiencies and diversion of public money for vested interests in public sector. In case of Pakistan, the aggregate amount of short term liabilities and repayments become greater than the foreign exchange reserves of the country, which shows that Pakistan will has to contact IMF to manage liquidity for external payments, as no big quantum jump in the exports or DFI is expected.
- According to IMF definition the international reserves (NIR) have declined to negative US$0.7 billion (based on December 2017 liabilities data) from US$7.5 at the end of the Extended Fund Facility (EFF) in September 2016.
- It is expected that at the year ending June 2018 current-account deficit to reach 5.3% of GDP, higher than the Fund’s 4.8% estimate, so Pakistan will likely need IMF support in 2018.
- It is expected that policy makers to heed IMF advice for further monetary tightening and expect the State Bank of Pakistan to hike its policy rate to 7% by end-FY18.