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Half of proposed budget allocated for defense, debt servicing

As the military assistance from the US been reduced, Pakistan has raised its defense spending for the year 2018-19 by around 19.6 percent, the highest increase during the government’s current tenure. To have good civil-military relations the government proposed Rs1.1 trillion budget for the three armed forces in the coming fiscal year. For the first time in Pakistan, defence outlay crossed the Rs1 trillion. The allocation for 2018-19 shows an increase of Rs180 billion, or 19.6 percent, as compared to the spending by the armed forces in the outgoing fiscal year.

The federal government has limited the budget for the development projects but given away more than half of the estimated budget of Rs5.237 trillion for new fiscal year 2018-19 to meet the growing needs of defense as well as debt servicing.

There was Rs1.1 trillion for regular defence budget and another Rs100 billion for Armed Forces Development Programme (AFDP). This was Rs1.2 trillion that is equal to 23 percent of the proposed total budget of Rs5.237 trillion.

Another amount of Rs1.607 trillion or 30.7 percent of the proposed budget has been earmarked for debt servicing. The original debt servicing cost in the outgoing fiscal year was Rs1.364 trillion. This is now 17.8 percent up for the next year.

The defence and debt serving would consume 53.7 percent or Rs2.8 trillion out of Rs5.237 trillion.

Another main expense is on account of pension including military as the cabinet approved Rs342 billion or 6.5 percent of the proposed budget under this head.

In the outgoing fiscal year, former finance minister Ishaq Dar had set aside Rs248 billion for pensions which the finance ministry has now revised upward to Rs320 billion. The increase will become massive 30 percent if the Rs100 billion allocated for the Armed Forces Development Programme (AFDP) is also included under defense spending. The figures also do not include Rs260 billion allocated for the pensions of military personnel, which will be given from the civilian budget.

Out of the whole defense budget, Pakistan Army gets 47 percent, 20 percent goes to Pakistan Air Force, and Pakistan Navy gets around 10 percent.

According to the budget document 2018-19, out of the Rs1,100 billion, Rs423 billion have been allocated for employee-related expenses, Rs253.5 billion for operating expenses, Rs282 billion for local purchases and import of arms and ammunition, and Rs141 billion for civil works.

In 2013-14, the total outlay of defense budget was around Rs600 billion which has now jumped up to Rs1.1 trillion, showing an increase of 83 percent in the last 5 years. Defense spending has always been a subject of intense discussion, with some seeking greater transparency and open debate about the military’s budget.

In recent years, the government provides more details about the defence budget. Pakistan military’s expenditure is the lowest in the region given the volatile security environment.

Indian total defense budget rose to 63.7 billion dollars for the year 2018-19. In his recent budget address, Finance Minister of India Arun Jaitley said the government will develop two defense industrial production corridors and bring out an industry-friendly military production policy to promote defense manufacturing in India.

In comparison Pakistan’s defense budget is the lowest in the region. It spends roughly the same allocation as a percentage of GDP (2.30 percent). Pakistan’s GDP is much smaller than that of India; about one eighth. Last year, India overtook Germany to rank at number 8 in the list of countries with the highest military expenditure. It spent more money on national defense than countries like Germany, Brazil, South Korea, Italy and Canada.

Pakistan on the other hand ranks at number 27 on the Global Index of Defense Budgets and in 2015-16 spent about $7 billion in its military budget.

By the year 2020, India is expected to emerge as the third-biggest country in terms of defense-related expenditures, behind the USA at number one and China at number two. Pakistan’s defense spending is centered on India given the bitter relations between the two neighbors.

Relations between the two countries have remained strained in recent months, with persistent incidents of clashes along the Line of Control and the Working Boundary. India raised its defense spending by around 8 percent. Nevertheless the size of the total Indian defence budget is six times higher than the total outlay of Pakistan’s defence.

First time in 16 years, Pakistan excludes US military Aid from Its budget estimates. The government has relied heavily on loans instead of generating a sustainable revenue stream. The government has borrowed a record, over $40 billion, in loans from local and international lenders in during its tenure.

Pakistan is planning to borrow another record-breaking $13 billion next year to cover the expenses. This is a record budget deficit of Rs2.029 trillion that will be equal to 5.3 percent of the GDP.

The government will borrow Rs2.029 trillion from domestic and external sources to bridge the budget deficit gap. The government approved Rs4.435 trillion tax collection targets for the Federal Board of Revenue (FBR).

 

The PM decided to increase the federal development budget to Rs800 billion against the finance ministry’s proposal of Rs750 billion for the next year.

For the first time in five years, the outgoing government has tried to present comparatively genuine budget figures, moving away from the policy of understating the expenditures at the time of the budget.

New Finance Minister Dr Miftah Ismail said the economy should not be slowed down just because of fiscal tightening. An additional Rs100 billion has been proposed for the Armed Forces Development Programme. Ismail had said the defence budget would get a regular increase and there would be no extraordinary increase in the defence budget.

For running the civilian government, the federal cabinet approved Rs445 billion for the next fiscal year, which is up by Rs68 billion or 18 percent over the original budget for the outgoing fiscal year. The government has revised upward the outgoing fiscal year’s budget for running the civilian government to Rs426 billion. At the revised budget, the increase is only Rs19 billion or 4.5 percent.

For the first time, the finance ministry has upfront allocated Rs36 billion for covering the cost of increase in pay and pension. The government would give minimum 10 percent increase in salaries, 10 percent increase in pension to new retirees and 20 percent increase in pensions to old retirees.

Another main expense is on account of pension including military’s, as the cabinet approved Rs342 billion or 6.5 percent of the proposed budget under this head.

For subsidies, the government has proposed Rs179 billion in the next budget which is up from Rs144 billion revised budget for the outgoing year.

For grants and other expenditures, Rs624 billion has been proposed for the next year as against Rs550 billion original budget for the outgoing fiscal year.

The net lending has been reduced from Rs123 billion to Rs78 billion for the next budget. The government has reportedly acknowledged that the country’s tax revenue is not even enough to finance defense and debt servicing. The government would be dependent upon foreign funding to finance the rest.

The value of Pakistan’s exports had come down which showed lack of value addition in export commodities/products.

The cabinet members expressed serious annoyance at Finance Minister, Dr Miftah Ismail for slashing development allocations by 33 percent to Rs 750 billion from Rs 1.001 trillion. During current financial year 2017-18 the budget deficit for the first nine months stood at 4.1 percent of GDP.

There was a proportionate decrease in realization of non-tax revenues and higher expenditure. On the revenue side, major expected shortfalls were projected tax revenue shortfall amounting to Rs78 billion, non-receipt of the Coalition Support fund of Rs127 billion and non-realization of Gas Infrastructure Development Cess (GIDC) to the tune of Rs95 billion.

On the expenditure side, an additional expense of Rs143 billion was incurred on account of pay and pensions, additional requirement of Rs100 billion for Armed Forces Development Programme, export incentive package of Rs47 billion and increase in debt services to the tune of Rs73 billion owing to rupee depreciation.

To cope with this situation and manage the fiscal deficit, some policy interventions were proposed.

These were to ensure collection of minimum tax revenue of Rs3.935 trillion against the target of Rs4.013 trillion.

The PSDP to be contained at Rs 750 billion as compared to the budgeted amount of Rs 1.001 trillion, and generation of provincial governments.

The Prime Minister agreed to the suggestions floated by the members of the cabinet and vowed that these would be considered by the Finance Division.

He pointed out that Pakistan had scarce revenue resources, adding that “our tax revenue was not enough to finance defence and debt servicing expenditures”.

The Prime Minister emphasized the importance of control over expenditure along with an increase in tax revenues through the recently announced tax amnesty scheme and widening of tax base with the support of NADRA (National Database and Registration Authority).

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