WILL THE BUDGET REDUCE INFLATION & FISCAL DEFICIT?
June 14 - 20, 2010
Pakistan's budget for the fiscal year 2010-11, starting from July 1, envisages cutting fiscal deficit to 4 per cent of gross domestic product (GDP), lower inflation, an economic growth target of 4.5 per cent and a 17 per cent increase in its defense spending. The budget is actually aims to consolidate the economic recovery and to achieve fiscal consolidation, as the government has set the fiscal deficit target at 4 per cent for the next fiscal, compared to 5.1 per cent of the GDP the country expects to achieve in the outgoing year. The cash-strapped country could not meet the fiscal deficit target of 4.9 per cent of GDP for the outgoing year 2009/10 due to additional security-related expenditure and delayed funds promised by the donors in Tokyo moot last year.
As a move to reduce its fiscal deficit to 4 per cent of GDP in the new fiscal year, the country imposed taxes on stocks and announced a pay cut for ministers. The central bank has already warned that budget deficit may widen to 5.6 per cent of GDP in the year ending June 30, missing the government's original target of 4.9 per cent.
In a post-budget press conference on June 6, the Federal Minister for Finance Dr Hafeez Shaikh said that several measures had been taken in the federal budget 2010-11 which would certainly help reduce inflation, budget deficit and improve the national economy.
With a total outlay of Rs3.26 trillion ($38.2 billion), 10.7 per cent more than last year, the country announced on June 5 the national budget for 2010-11, the government has earmarked Rs663 billion for development in the new budget. It has reduced allocation of funds for power sector to Rs118.343 billion from Rs141.87 billion for ongoing financial year.
Water sector has been allocated Rs28.4 billion under federal Public Sector Development Programme (PSDP). The health sector spending has been slashed to Rs16.9 billion against Rs18.5 billion in outgoing financial year. Allocation for education is Rs21.4 billion, which is 7.6 per cent of federal PSDP. Critics say that social sector development actually depends on education and health sectors, which have not been given due priority in the budget allocations.
The budget has given relief to the public servants by raising their salaries by 50 per cent. It proposed to double the medical allowance for employees working in BS-1 to 16 and increased the medical allowance by 15 per cent of those above grade 16. The pension of those who had retired after 2001 was increased by 15 per cent and those who had retired before 2001 by 20 per cent. The minimum monthly pension was proposed to be increased from Rs2000 to Rs3000 while the rate of family pension was enhanced from 50 to 75 per cent.
The rising inflation has drastically curtailed the purchasing power of salaried class, while it has hit the poor disproportionately. The government has so far failed to reduce inflation to a single digit, as the headline inflation still remains in double digits breaching the government's budgetary target of nine per cent for the current financial year 2009-10, which will end on June 30.
Inflation for 2010-11 is targeted at 9.5 per cent, compared with the central bank's forecast of between 11.5 per cent and 12 per cent.
Consumer price index (CPI) inflation rose in April by 13.26 per cent over the same month of last year and 1.73 per cent over the previous month, while core inflation (non-food, non-energy) also rose 10.6 per cent in April from 9.9 per cent in March. This also goes against the inflation level of 11 to 12 per cent, forecast by the country's central bank in its last monetary policy statement. Many analysts see the current rise in inflation a result of cost-push, spawned by increasing prices of fuel, food, raw materials, transportation, construction materials and elimination of energy subsidies.
The inflation would rise to 14.58 per cent in the current fiscal 2009/10 (July-June) against the government's annual inflationary single-digit target of 9 per cent, said a quarterly survey conducted by Pakistan Institute of Development Economics. The survey suggests that coordination between the monetary and fiscal policy were necessary to control inflation.
The government has also deferred the imposition of value-added tax (VAT) for three months. The VAT is a conditionality set by the IMF for Pakistan when it agreed to an emergency package of $7.6 billion in November 2008 to avert a balance of payments crisis. The loan was increased to $11.3 billion in July last year. The General Sales Tax (GST) rate has also been increased from 16 per cent to 17 per cent and it will remain the same as long as the VAT is not enforced. Analysts argue that the increase in GST rate will push the cost of production and cost of living.
Pakistani business community and opposition parties have serious reservations against VAT which they think would fuel the already high inflation in the country. Officials in Islamabad however call it a propaganda being made by some unscrupulous elements to create artificial inflation after introduction of VAT from July 1, and use it for unjustified price hike. The proposed GST reform would not apply to turnover less than Rs7.5 million per year whereas the current threshold is Rs5 million per year. This would help broaden the tax net instead of burdening the existing taxpayer.
Most of the businessmen are dissatisfied with the budget, which has brought no visible measures for the revival of the industry and economy. Traders and industrialists believe that the measures taken in the budget 2010-11 would result in increase in cost of doing business and cost of living and the budget proposals are totally devoid of incentives to promote exports.
In the budget, the federal government has imposed a number of new taxes to increase dwindling revenues. It has imposed a 10 per cent federal excise duty on electronic appliances. It has also imposed a 10 per cent capital gains tax (CGT) on shares held for less than six months, and 7.5 per cent for between 6 months and one year. There will be no tax for stocks sold after a year.
Critics say that levy of Rs9 billion on POL products would increase the cost of production. Similarly, Rs10 increase per 5.09 MMBTU of natural gas will have a snowball impact on cost, particularly for those industries having captive power plants. This will also push the cost of CNG consumed by vehicles and of electricity, as natural gas is also being used by CNG stations and power generation plants.