June 11th was the lucky day for Hammad Azhar, Minister of State for Finance and Economic Affairs as he presented federal budget in the National Assembly of Pakistan for the first time in his public life. This budget is in fact the second budget of current federal government but first budget of this government for a full year. There are a number of areas which the government has tried to address in the 2019-20 budget but there are many areas which are either not addressed directly or are completely ignored. Big challenges country is presently facing are low growth, current account deficit, poverty, inflation, subsidies withdrawal, price hike, agriculture development, and education and health. Every budget is termed as jugglery of words and numbers but it seems that there is something really missing in this budget. On income side, numbers are unrealistic and expenses are under stated.
Pakistan tried to get funds from its close friends and also got some as well, and later finally approached IMF for a bailout package. The government has finally disclosed its Plan B (a rescue plan) even before the implementation of its Plan A after coming to power in 2019, unlike others who conceal their Plan B until their key plan fails. Prices of energy and interest rates were increased even before entering into the program of IMF. No one should have now doubts in mind that IMF is coming with full force. It is said that the budget is drafted on the guidelines given by IMF and it would be one of the biggest beneficiaries of this budget. IMF will be able to sell its debts at a higher cost and will take full control over the policymaking rather than just preparing the policy.
Opposition parties have asked government to increase the salaries and minimum wage to Rs. 20,000, which is practically very difficult. There should be a linkage between increase in salaries and the productivity of the labor. Blanket increase in minimum wages will increase the cost of production and will also increase the aggregate demand of goods, which will have fuel the inflation. It can be said that Rs. 20,000 is just a small amount and what that person can get from this amount. There should be a systematic basis and reward should be given to efficient labor. Instead of increasing the salaries, government should link the minimum wages as per the skilled, semi-skilled and unskilled labor category, as we see in the Middle East. If minimum wage of a skilled worker is higher than unskilled then there is a possibility that an unskilled labor in Pakistan will try to learn and will improve his skills and will become a skilled worker in few months. This will actually serve the country big time. In the Middle East, English speaking skill can even change the category of a labor from semi-skilled to a skilled. Such small things can bring a lot of changes in the livings of labor and thereafter will also benefit the country in large.
Moreover, it would also be interesting to see how government can actually increase the salaries of government employees or increases the minimum wages because that would be against the agreed terms and conditions of IMF. Increasing minimum wages or salaries means giving hard money to a specific group, which will consequently increase the aggregate demand, whereas IMF has asked to curtail the aggregate demand.
Tax rates on salaries have been increased many folds as compared to last federal budget. There are two aspects to this matter, one, the rate of tax on the salaries and another is minimum salary limit for the deduction of tax. Last government in its very last budget, increased the minimum salary limit from Rs. 4,00,000 to Rs. 12,00,000 per annum. Due to this, at least 5,00,000 tax payers were eliminated from the tax net. Current government has on one side reduced the minimum limit to Rs. 6,00,000 but on other has increased the tax slabs. Increasing tax slabs would be a huge burden on the salary class, which should be reversed. There are many other ways to collect tax and salary class is already under financial stress.
In normal circumstances, government can increase salaries and give benefits to the people but these are not normal circumstances and budget is prepared on the guidelines given by the IMF. While reviewing budget, we see Rs. 925 billion allocation to the development program at the federal level and the same level is also fixed by the provincial governments. This development program consists of construction of two dams, few projects in the agricultural sector, development of human resource and social safety net which is Ehsaas Program, Benazir Income Support Program and Youth Loan Program etc. Such initiatives are good for the people of Pakistan. However, government should change the distribution methodology of Benazir Income Support Program. In present form and shape it is not a service to the country because just giving a monthly stipend to people living below the poverty line is not sustainable. There should be a skill development program and instead of spending on say 100 people, spend this money honestly on say 10 people by giving then technical training so that can effectively generate economic activity. Or instead of giving them hard money, provide them support to establish their small business. Obviously, those who are getting such support are people living below the poverty line therefore it is better to give them funds to start their fruit selling shop or type repair shops type business etc…
Government has already increased the prices of gas and electricity and in coming months, it will further increase. Government has to remove subsidies from the electricity and gas. As per an estimate, impact of new indirect taxes would be around Rs. 60,000 on an average individual, whereas income of the individual would not increase in the same pattern. Tax targets in the next budget are unrealistic as it is near impossible to touch the tax target of Rs. 5555 billion, which is 45 percent growth in the tax collection. This will break the backbone of entire middle class. As per a report of the World Bank, if government withdraws all the exemptions, government can collect Rs. 8000 billion which has apparently become the basis of such ambitious tax target. The World Bank is also going to give a US$ 400 million to Pakistan for such reforms.
Government should also focus on power and energy sector reforms and should address the circular debt issue once for all. It is over Rs. 1000 billion, excuse me, its over Rs. 1 trillion, if you really want to feel the magnitude of this mega issue. There are some better ways to address this mega issue than to pay off by taking loans.There are many aspects to this issue, which can only be addressed if proper and impartial evaluation is done.
Money circulation in the country has increased in fiscal year 2018-19 as compared to fiscal year 2012-13. It was used to be around 10 percent of the GDP at a level of around 1,674 whereas it has gone up to 5,128 which is around 15.8 percent of GDP. This shows that people are withdrawing money from the banks and keeping it in their homes. This trend is going to increase in coming days for sure, as FBR is checking accounts having a minimum balance of Rs. 5,00,000, just five lakh. They are seriously disconnected with the ground realities. In June 2014, currency in circulation was around 28 percent and now it has crossed around 44 percent. Somehow, panic has been created by few in the government. Response to tax amnesty or asset declaration is also lukewarm and government is not getting response as per their expectations. This above mentioned trend will have a serious implications on the banking sector. Banks will not have enough deposits thus will not be able to lend enough. Rest you can imagine the situation. Not enough profits of the banks, not enough payment of corporate tax by the banks, not enough tax collection by the government. The mechanism is that simple but who cares.
It is a considered opinion that no one in the policy making body is serious in addressing the issues. As a matter of fact, it is not a rocket science to bring betterment in the economic situation of the country. One key issue which doesn’t get enough attention from any government is to eliminate smuggling completely. And then also stop importing chocolates, tea, edible oil type goods. These two simple measures can bring a lot of positive change in the economic condition of the country.
Somehow, governance is not up to the mark which is effectively the basis of economic reforms. Dollar will further appreciate, oil prices (regardless of international trend), interest rate (KIBOR) and inflation will further go up and economic growth will go down with the measures taken in the budget. There is a high likelihood that government will issue a mini-budget by the end of November or December as it will not be able to generate enough funds through tax collection. Federal budget 2019-20 can be beneficial for certain individuals but certainly not for the entire nation. We are running out of time and our elected representatives must show some seriousness in resolving national issues and focus on the economy.