AND BUDGET 2002-03
The irrefutable situation is that the common man is facing acute economic problems; and that economic pressures give rise to innumerable social and moral problems
Institute of Policy Studies
July 08 - 14, 2002
Preparation and presentation of budget and ensuing debate on it are a yardstick of a government's performance. It is especially so in a country where government controls a substantial part of GDP (Gross Domestic Product). Since the government's role in such an economy is not limited to giving it a direction but is extended to the provision and use of resources, and investment etc., it, therefore, becomes an imperative to have open debate on its budget so that unattended issues are highlighted along with facts, background to decisions, priorities and implementation.
In a democratic dispensation, parliament plays central role in this process of debate and discussion in which the whole nation takes part. It is unfortunate that there is no such forum in the country these days. The finance minister's post budget conference and seminars do provide a useful opportunity to discuss the budget. These discussions can be fruitful if different segments of society come out with workable suggestions and government makes use of them. Following analysis of the federal budget 2002-03 by IPS Working Group is being presented with the same spirit.
Pakistan's economy has for quite long been under pressure. The impact of this pressure on economy is quite visible in every sphere of economic life. While the role of creditors and donors is increasing in national life and in the decisions that affect it, national unity and harmony has suffered setbacks. Lack of objectivity and continuity in policies, rising corruption and absence of good governance, unjust distribution of income and wealth are both results and causes on this economic malaise. This is how a vicious circle has overtaken the economy. Along with these permanent challenges facing the economy, tension on the borders is yet another pressure on it.
Dangers of war push the economy into stagnation. The US strikes on Afghanistan started in October last year, and now Pakistani and Indian forces are standing face-to-face for the past several months. This has adversely affected the economy. While the government of Pakistan took some extraordinary measures to avert war and ease out pressure, it is difficult to say that the danger of war is no more. Indian demands are continuing despite the measures taken by Pakistan and the tension might escalate and flare up any time. Experts opine that one of the objectives of India is to keep Pakistan's economy under pressure and block investment in the country by escalating tension through continuous troop-deployment on its borders.
This is the background in which budget 2002-03 has been presented. For an objective analysis, it would be useful to set the parameters needed to evaluate the budget.
*If elections are held in October this year according to the government's claims and the Supreme Court's deadline, this budget is going to be the last one by this government. Therefore one of the important yardstick to gauge this budget is that how far the government's economic program and priorities, announced at the time of assuming power in 1999, have been realized. And what was being expected of the budget 2002-03 in this regard.
*Along with this, it must be kept in view that the real standard to gauge an economy is its sustainability and capacity to survive, i.e. self-reliance. The health of an economy can be determined by GDP and its growth, increase in exports, rise in investment, per capita income and its just distribution, employment and tax revenues along with expansion in economy.
*The finance minister has termed budget 2002-03 as business and investment friendly. There are no two opinions regarding needs and prospects of investment in the country and it is a good target in this background. However, there is a need to analyze that how budgetary measures would help improve investment.
*Islamization of economy was a challenge before the government, especially in the wake of the Supreme Court verdict declaring all forms of Riba un-Islamic. How much it attempted to meet this challenge and what measures were expected from it in this direction, were the pertinent questions before the announcement of the budget.
*The WTO process of negotiations is continuing and we have time till December 2003 to try to impact these agreements according to our priorities and to safeguard our interests.
*Most important, what benefits the budget would bring for the common man?
THE ECONOMIC PERFORMANCE
Reduction in foreign loans and rise in foreign exchange reserves are being declared as the most important achievements regarding the economic performance of the government during the current year. Improvement in balance-of-payments is also presented as a major success. It is a good omen that our foreign debt has come down from $38 billion to $36 billion. Similarly, the balance of payments has seen improvement but this is limited to the current account. It is because remittances of expatriates have doubled than the last year. Moreover, if the official transactions that have been acquired as grants or loans from foreign countries are included then the balance of payment shows a surplus of Rs.331 million. But excluding official transactions and limiting balance of payments to trading and other financial transactions, then deficit shoots up to Rs.508 million, though this is far less than the average deficit of $3 billion in the past.
The real question in the backdrop of these indicators is: what accounts for rise in foreign exchange reserves, reduction in foreign debt, and improvement in balance-of-payments? If these developments are the result of genuine economic activity, stability, increase in production and the resultant increase of government resources, then it is really satisfying. But, if it is not so, and this is what the fact is, then this apparent and temporary success should be taken as an opportunity to take steps that could take the economy toward real expansion and growth in the future.
*Reduction in foreign debt is not because of any strategy. First, repayment of dues was inevitable in the face of pressure from donor countries and international financial institutions, while there was complete ban on acquiring new loans. Then, the post-Sept. 11 situation provided an opportunity for rescheduling and re-profiling of loans that helped reduce the overall foreign debt burden. The question is: what about the future? Though the finance minister claimed in his post-budget press conference that the country would be free of IMF in one-and-half year, yet in the next financial year massive Rs. 198 billion (over $3.25 billion) has been earmarked as external resources. Two-thirds of this, i.e. Rs 135 billion, would be direct foreign loan. The statement of the finance secretary Mr. Moin Afzal, which amounts to negating the finance minister's claim, is worth considering in this regard. He says that Pakistan will receive loans to the tune of $2 billion each year from IMF, World Bank and Asian Development Bank till 2005. According to him, $2.1-$2.5 billion would be acquired during the fiscal year 2002-03. There is no indication of reduction in the domestic loans either. During the current year, Rs 62 billion were borrowed from the banks as against the target of Rs 10 billion. The budget 2002-02 shows Rs 35 billion non-bank borrowing in the next fiscal year.
*The main factor for the increase in foreign exchange reserves is the purchase of over $3 billion by the State Bank from open market. The finance minister has said in his budget speech that the target for forex reserves by the end of fiscal year 2002-03 has been set at $7 billion. Experts are expressing fears that purchase of dollars by the State Bank might exceed $4 billion this year. If these Rs. 240 billion, which were used for the purchase of dollars, could be utilized in productive activity, they would increase investment and employment opportunities in the country.
Another reason for the forex reserves rise during the current fiscal year (2001-02) is the increase in remittances sent by overseas Pakistanis. These remittances exceeded $2 billion in eleven months (July-May). But, as experts say, this does not reflect confidence in government policies. This has been possible because of the reverse capital flight — Pakistanis felt that their money had become unsafe in foreign countries and because of the strict check on sending money through means other than banks. The government thinks that these remittances would increase further in the next year, but it is premature. Month-wise statistics of remittances after September 2001 reveal the uncertainty in this regard.
Workers Cash Remittances
Pakistan Economic Survey, 2001-02, Table 9.16, pp132.
*There is also a need to understand the reality of the balance-of-payments, where exports stagnation is the major issue. Exports were reaching the level of $10 billion by the year 1998. The target for the current year was the same, i.e. $10 billion, but now the estimate is that they would be barely up to $9.2 billion this year. The target for imports, on the other hand, was fixed at $11 billion. The imports were affected by the increase in shipping and cargo charges in the wake of events of September 11 and by the surcharge under the head of risk of war. Moreover, decrease in prices of petroleum and its products and no import of sugar and soyabean resulted in the overall decrease of imports against exports. * This is how trade deficit decreased. Due to this decrease, balance-of-payments and forex reserves also saw improvement, but it would not be wise to equate it with stability in economy.
* Other indicators regarding economic expansion, increase in national production and judicious distribution of wealth, too, are not encouraging. Investment in the country is decreasing continuously and its ratio has come down from 17-18 per cent of GDP to less than 13 per cent during the past few years.
Investment as % of GDP
a. Fixed Investment
b. Public Investment
c. Private Investment
Pakistan Economic Survey, 2001-02, Table 1.3, pp 4.
The slump in the economy and stagnation in the industry can also be seen in the fact that commercial use of energy decreased in 2000-2001 as against 1999-2000 and even further during the current year. The use of petroleum and its products, gas and electricity in the industrial sector has decreased like that of energy. Unemployment is on the rise, which was 5.89 per cent in 1999 but shot up to 7.82 per cent in 2002. Agriculture is facing serious problems, and apart from the production of sugarcane, sugar and, to some extent, cement, both agriculture and industry are in the throes of recession. All these are the signs of stagnation of economy. This is the reason why the government's target of tax revenue has not been achieved despite all attempts at documentation, tax survey, whitening of black money, and increasing the revenues by imposing sales tax. The target has been revised downwards five times this year, from Rs.457 billion to Rs.414 billion. The estimate is that practically Rs. 400 billion would be collected.
*The extent of unjust distribution of wealth and rise in poverty can be estimated from the fact that 17 per cent of the population was living below the poverty line in 1980, which rose to 37 per cent in 1997 and 39 per cent in 2001. While the definition of poverty adopted by the government and the data available in this regard are debatable, yet the facts presented in the Economic Survey 2001-02 tell that only 2,306 calories per head are available in 2001-02 as against 2,706 in 2000-01. This would naturally have the most impact on the poor segments of society. It is important to note that an average intake of 2,150 calories has been declared as standard for poverty line.
Keeping in view the fact that the upper 20 per cent of the population with respect to income in the country accounts for 50 per cent of the income, it is not difficult to find out the reality of this average. So, if the food expenditure of upper classes is kept in view, then the average shows that the number of people living below the poverty line is much higher than the government's estimate (of 28 per cent). Another worth considering aspect is that per capita income is continuously decreasing in the country: it was $493 in 1996-97, which came down to $446 in 1999-2000 and has plummeted to $429 now in 2002.
This all shows that the economic situation cannot be considered satisfying in any way, and that it is as uncertain as it was in 1999. The basic reason behind this is that government took steps to reduce budget deficit and increase its resources during this period, but did not devise any strategy for the real economic growth. Does the budget 2002-03 have any signs of such a strategy? Apparently, the answer of this question is in the negative. In this regard, it is useful to have a look at the targets of the budget.
*The GDP growth target was set at 4 per cent for fiscal year 2001-02, which was slashed to 3.3 per cent later. The government claims that it will be 3.6 per cent by the end of the year. According to independent economists, the real GDP growth rate is not above 3 per cent. This target has now been fixed at 4.5 per cent for fiscal year 2002-03, with that of agriculture as 2.4 per cent and of industrial sector at 6 per cent. An objective view of the situation, as presented above, shows that these targets are unachievable in the prevailing circumstances.
*Overall fiscal deficit (OFD) target was set at Rs 186.9 billion, i.e. 4.9 per cent of GDP of Rs 3800 billion, for the year 2001-02. However according to government's own estimates, it will go up to Rs 257 billion, or 7 per cent of GDP by the end of the current fiscal year. For the fiscal year 2002-03, this target has been fixed at 4 per cent of GDP, i.e. Rs 163 billion. Perhaps, the relief in debt-servicing is the reason behind this optimism. Though the current expenditures have significantly decreased due to rescheduling of loans, yet experts say the target is unrealistic. Moreover, the steps to achieve this target are not clear. The allocation under the head of expenditure to run the civil administration has been increased to Rs 92.6 billion, as against the revised Rs 84 billion in the fiscal year 2001-02.
Defense budget may also have a bearing on fiscal deficit. An amount of Rs 146 billion has been allocated for defense in the budget 2002-03, which is Rs 15 billion more than the amount of Rs 131 billion allocated for defense in 2001-02. However, when compared to the actual expenses of Rs 151 billion under this head in 2001-02, this shows a decrease of Rs 5 billion. Keeping in view the regional and global politics and the prevailing tensions on the borders, with clear announcements by the Indian leadership that withdrawal is unlikely in the near future, it would be naive to think that a lesser amount on defense would suffice.
Agriculture: Agriculture accounts for 26 per cent of the GDP and is like the backbone for the economy. The target for the growth of agriculture has been fixed at 2.4 per cent in the next budget, which is even less than the population growth rate in Pakistan. This gives rise to fears of deficiency in food and increase in food imports in the coming years. Before the budget, the finance minister had repeatedly said that the government would provide concessions in the budget for the development of agriculture sector. Though some concessions (like the increase in agricultural loan, for example), yet the real problems of the sector have been overlooked. General Sales Tax (GST) on fertilizers and pesticides would certainly cause price-hike in these important 'inputs'. This would, no doubt, add to the burden on the grower, especially the small farmer. Similarly, diesel has become an essential 'input' in the agricultural sector because of the introduction and use of tube-wells and increase in its price would also directly affect the agriculture produce. There are also reports that the government has lowered the target of wheat's purchase for the year 2002-03 by 50 per cent while the alternative system for storage and purchase of the wheat is still far from completion. These factors have forced farmers to sell their crop at the rate far below the official rate of Rs. 300 per 40 kg. The budget is silent with respect to these issues.
Industry: As to the industry, the government claims the budget 2002-03 as investment-friendly and to prove its assertion it refers to reducing of import duty on many items, bringing it down to 25 per cent. The fact of the matter is that this lowering of import duty is part of WTO and other international agreements. While this would benefit the foreign exporters that send their goods to Pakistan, the ground reality cannot be changed with lowering certain duties when industrial growth and production has come to a grinding halt. Unavailability of foreign raw material at low prices is not the real cause for lack of investment, the real factors include ever-increasing cost of electricity, gas, petroleum and raw materials, failure in checking the spread of smuggling, and the deteriorating law and order situation. In these circumstances, even the local investors are discouraged to invest, what to talk of foreign investment!
Quite contrary to the finance minister's claim, and as the industrialists and traders are saying, enlarging the range of excise duty, instead of reducing it as was being promised, has in fact doubled the tax burden. Likewise, the import duty on capital goods and industrial machinery is unjustified. Duty has been levied on those items on which there was none before; if there had been any, it has now been increased. The anomalies of Sales Tax have not been removed. Along with the GST, the notion of giving District Governments powers to levy more taxes would only add to the burden of taxes.
Smuggling in the name of Afghan Transit Trade is going on unabated. The difference between the tariff on imported raw material and the locally manufactured goods has virtually become very nominal. This is destructive for local industry. The current situation is that many imported goods are available at far lower prices than the goods that are manufactured in the country. The local industry is, thus, facing tough times with the competition getting tougher day by day. It is becoming almost impossible for it to lower the prices in the wake of utility charges in particular. Without assessing how much burden the local industry and trade can bear, the government is adamant on increasing the tax revenue by Rs. 60 billion (i.e. by 15 per cent) in just one year. This might deal a death-blow to the industry of the country. How can, then, the budget be termed as friendly for trade and industry in the face of these complaints of industrial and trading community?
The 7.5 per cent raise for the development program, as against that of the previous year's, is a good omen. The details of the development program show that major shares have gone to communication, information technology, railways, and water and electricity. Yet, the decrease in the development program for petroleum and natural resources (mere Rs. 340 million as against Rs. 6 billion in the previous year) is beyond comprehension. It is especially so because of the need of benefiting from the resources and opportunities in Pakistan in this sector.
Islamization: As to the Islamization of economy, it was expected that the government would at least take some measures that would provide incentives for Islamic banking, and that it would remove hurdles that are obstructing progress in this direction. The government did not do the needful and the whole issue of Islamization of the economy is in doldrums. Establishment of Al-Meezan Bank with the permission to initiate Islamic commercial banking is a welcome development. However, it is not enough. The need was to have a comprehensive program of research, training and education along with the policy initiatives and legislation with a view to give Islamic banking an opportunity and level-playing field. It appears that instead of remolding the whole economic system into the Islamic one, the government strategy is to give Islamic banking the 'concession' of coming into competition while the interest-based banking system retains protection under the constitution and law. This is why the finance minister said during his press conference that interest-based system cannot be replaced 'overnight'. This he says knowing fully well that 'full 11 years have been wasted' since the Federal Shariat Court's verdict in 1991. The Supreme Court had upheld this verdict, though it has now held its own decision aside and referred the issue back to the Shariat Court (June 24). It is, therefore, turning a blind eye to the factual position to expect that the government would take solid steps for interest-free system.
WTO and its Implications: The issue of WTO, its possible impact on Pakistan's economy in the future, and what we should do to safeguard our interests are the questions that need sincere and immediate attention. The government has announced a reduction in maximum tariff rates from 30 per cent to 25 per cent. These rates are expected to be reduced further, from 25 per cent to 20 per cent in the next budget for 2003-04, thus further opening of Pakistan's trade and industrial sectors to foreign competition.
Binding of tariffs plays an important role in protecting domestic industry. When the bound rate is higher than the applied rate, it leaves a room for the government to provide additional protection to the domestic industry up to the level of bound rate without invoking any WTO provisions or its interference.
Pakistan, in 1992-93 bound about 30 % of the tariff lines under the market access negotiations held under the GATT in the following manner:
The rest of the tariff is still unbound. The situation demands that Pakistan should review its position keeping in mind the interests of Pakistan's industry and other stakeholders in the matter, with its trading partners. Pakistan should review its position on bound tariff rates in terms of the biding effected in 1992-93 vide the Market Access Negotiations under the GATT; and binding of rest of the tariff.
The situation at the moment is that the advanced and economically developed countries are successful not only in concluding international agreements on terms that suit their interests on account of their better homework and international political clout, they take full advantage of different concessions in these agreements. On the other hand, people in Pakistan don't know even the basics of WTO. The commerce ministry has only recently formed working groups on different agreements. Representatives from the private sector have also been taken into these groups. This is a good beginning that needs to be sped up and sustained.
Poverty and the cost of living: The government's claim that its fiscal policies have not burdened the common man does not hold water. It, in particular, refers to the inflation, which it says is at 2.6 per cent. Though official statistics for determining the level of inflation are rarely relied upon, the situation cannot be termed satisfactory even after casting all suspicions aside. The real causes of low inflation rate are: ever-increasing poverty, decline in investment, and low growth-rate. Quite evidently, decrease in the overall demand in the economy would automatically keep the inflation from rising.
* Looking from the perspective of different levels of income, it needs to be noted that the rate of inflation is maximum, i.e. 5.1 per cent, for those whose income is between Rs. 3001-5000. It should also be noted that prices of wheat, flour and oil/ghee have shot up by 4.52 per cent, 6.47 per cent, and 18.46 per cent respectively — and these are essential commodities in every household. Then, indirect taxes account for 2/3rd of total taxes, but no serious effort to reduce them was made in the past nor its need is being felt now. Quite contrarily, the budget sets the indirect tax revenue target at Rs. 312.2 billion — though it was Rs. 267.8 billion in 2001-02 and Rs. 266.5 billion in 2000-01. The target for revenues under the petroleum surcharge has also been raised from Rs. 39 billion to Rs. 45 billion.
* As mentioned earlier, the debt-servicing is significantly lower than that of the previous year because of decrease in the overall debt and its re-scheduling. It was Rs. 329 billion for the year 2001-02 that has been set at Rs. 189 billion for 2002-03. It was being expected that this reduction in expenditure would have a trickle down effect and the common man would be allowed to share the benefit. However, this drastic reduction in expenditure has not been translated into common man's benefit in any way.
* Imposition of 15 per cent GST on edible oil and ghee has made these essential commodities costlier. While the finance minister said in his post-budget press conference that there would be a rise of just two to three rupees per kg of ghee or oil, traders hold that imposition of GST along with retaining the import duty would lead to an increase of Rs. 12 to Rs. 15 per kg.
* For the year 2002-03, the federal government has reduced the subsidy to Wapda by 50 per cent. In the ongoing fiscal year, Wapda had been given a subsidy of Rs. 9.45 billion under the head of GST, which has now been cut to Rs. 4.33 billion. Same is the situation with KESC whose subsidy has been cut from Rs. 1.4 bilion for the ongoing year's estimates to Rs. 850 million. Due to this reduction in subsidy, Wapda would go to NEPRA for increasing electricity prices. This would certainly affect all the consumers of electricity and all sectors, including agriculture and industry, would also bear the brunt.
* The revenue target from Petroleum Development Levy (PDL) was revised from Rs. 32 billion to Rs. 39 billion for the current year. This has now been set at Rs. 45 billion. It is quite obvious that this increase of more than 40 per cent would not be achievable from the rise in demand of petroleum products. As the demand is actually registering decline, the fear is that the government would further raise the prices of petroleum products next year. These prices are already far above those in the international market and are not only adding to the burden of the common man but are also causing stagnation in the whole economic process.
* Though the minimum income limit that was exempted from tax (i.e. Rs. 60,000) has been raised to Rs. 80,000, this would not benefit the common man. Rather, those whose income is between Rs. 80,000-100,000 would have to pay even more in terms of tax because the tax rate had been raised from 5 per cent to 7.5 per cent during the last year. Moreover, the decision to include house rent and other allowances in the taxable income would also adversely affect the lower-income groups. The estimate, therefore, is that those who earn Rs. 6,000 to Rs. 30,000 per month would have to pay 87 per cent to 166 per cent additional amount of tax. Withdrawal of exemption of purchase of books from the taxable income is also an unwelcome step.
The irrefutable situation is that the common man is facing acute economic problems; and that economic pressures give rise to innumerable social and moral problems. This is the situation that is responsible for ever-increasing frustration and crimes, robberies, burglaries and suicides. No doubt that such a situation is alarming and needs to be dealt with on a war-footing basis with a new, rejuvenating and comprehensive strategy. But, by delving into the details of the federal budget 2002-03, it is difficult to say that policy-makers are really cognizant of the critical situation and are taking necessary steps for its rectification. Like the past, Budget 2002-03 is devoid of any new strategy. It does not evoke confidence in the future that economic instability and stagnation would give way to viability and progress.