PRE-BUDGET

People friendly?

From SHAMIM AHMED RIZVI, Islamabad
May 29 - June 04, 2006

The constant increase in imports during the current financial year has so far reflected to reach an ever highest level of $ 29 billion portraying a possible trade deficit around $ 12 billion- the highest ever in the history of Pakistan.

Pakistan's trade deficit widened by 93.65 percent to 9.427 billion dollars during July-April, 2006 as against 4.868 billion dollar during the same period last year. Exports during this period registered a growth of 17.80 percent to 13.523 billion dollars, while imports shot up by 40.38 percent to 22.951 billion dollars. On a monthly basis, trade deficit rose by 33.61 percent to 807.918 million dollars in April 2006 as compared to 604.665 million dollars in the same month last year. An unprecedented increase in imports, which was responsible for the huge trade deficit, resulted from a number of factors. The increase in international oil prices led to a gradual increase in the oil import bill since the fiscal year 2003-04, but its price impact was the largest in absolute value terms during the current year. Imports of items under machinery and metal group, road motor vehicles, oil seeds, wheat, sugar and pulses also recorded sharp increases, while, on present trends, exports are lagging behind the target of 18 billion dollars by a considerable margin.

The deficit for fiscal 2003-04 was $3.278 billion. The figure almost doubled to $ 6.213 billion in fiscal 2004-05, and now looks set to almost double again to $ 12 billion in fiscal 2005-06. Thus the trend seems to be inexorably upward, and could pose serious problems for the country's economy in the year ahead unless the government takes urgent steps to significantly boosting exports.

The government, for its part, says that higher imports reflect higher levels of economic activity, particularly in the large scale-manufacturing sector. This may be true. At the same time, however, it is also true that Pakistan's economy cannot go on sustaining a widening trade deficit indefinitely. According to the government sources the current fiscal year's projected trade deficit of $ 12 billion will be partly offset by about $ 4 billion worth of remittances by overseas Pakistanis. Some offsetting will also come from foreign aid flows (both bilateral and multilateral), which are currently running at an average of about $ 5 billion a year. This, however, will still leave Pakistan with a gap of about $ 3 billion in its national balance of accounts at the end of the current fiscal year.

Moreover, hardly any of the foreign aid received by Pakistan is in the form of grants; most of it is in the form of short term, medium term and long term loans that have to be serviced and repaid. Given this fact, these aid flows cannot be considered money that belongs to Pakistan. If these aid flows of $ 4 billion a year are subtracted from the equation, the trade deficit burden this year will amount to $ 7 billion. Where is this money going to come from? And where are the money going to come from to finance next year's trade deficit, and the year after that, and the year after that?

Soaring international oil prices are one aspect of the trade deficit problem, a problem made more acute by the fact that the country's oil consumption has also been growing rapidly in recent years partly because of higher levels of economic activity and partly because of the continuing high rate of population growth. The other aspect of the problem is that Pakistan's exports are growing at a much slower pace than its imports. Efforts to boost exports have been hampered b y a variety of factors, including the limited range of goods that Pakistan produces for exports. Textile products still account for more than 60 percent of country's exports. This over dependence on textiles has to change if Pakistan is to significantly boost exports over present levels. Efforts to boost exports are also hampered by the high cost of manufacturing inputs that make Pakistani products less competitive in export markets. To cite only one example, Pakistan's electricity tariffs are the highest in the world, affecting the cost of goods across the board.

Addressing the annual meeting of the Trade Policy Advisory Council in Islamabad in the first week of April, Commerce Minister Humayun Akhtar Khan urged trade representatives to come forward with suggestions and proposals for boosting exports, so that these could be considered by the government and incorporated into the next trade policy. Textile Minister Mushtaq Ali Cheema also attended the meeting. Other participants included officials of various federal and provincial ministries, and representatives of business chambers, trade bodies and the corporate sector. The Commerce Minister said that the purpose of the meeting was to get the benefit of the collective wisdom of the participants. He assured the participants that the government would give serious consideration to their suggestions and would take steps to remove the bottlenecks standing in the way of boosting exports.

However, officials in the ministry disagree with the notion that the rising trade deficit will negatively affect the overall national economy but will leave a slight impact. They attribute the continuous upward trend in the imports to a number of reasons including the inflated oil prices in world market, auto imports mainly CKD and CBU, duty free imports of sugar, wheat, iron steel, cement and other construction materials due to the increasing demand in the earthquake affected areas of AJK and NWFP. The government argues that the privatisation proceeds of PTCL and donor agencies aid for the earthquake has stabilized the foreign exchange reserves of Pakistan near 13 billion dollars in this fiscal year and there was no need to worry about the fast expanding trade deficit.

Keeping in view rapidly widening trade imbalance and dwindling foreign exchange reserves the economists, analysts and multilateral donor agencies, representatives are asking the government to put some curbs on the imports of non-essential items. Obviously, the trend of increasing trade deficit is a high downside risk to the economy and needs to be reserved. Swelling trade deficit would eventually cause a drop in the value of the rupee against other currencies, which would further create inflationary pressures in the economy and aggravate the miseries of common man. Unfortunately, the country's economic policy makers do not seem to realize the gravity of the situation and are trying to take credit for achievements like increasing exports to 18 billion dollars, and maintaining an adequate level of reserves, which do not depict the totality of the picture. For instance, overall trade balance is more important than the level of exports and one may have been justified in taking pride in the level of reserves if these reflected net earnings of the country. It is high time for the policy makers to take stock of the situation and design appropriate measures to narrow the trade gap to manageable limits. There is urgent need to contain overall import demand in the economy by adopting restrictive fiscal and monetary measures. Obviously, fiscal deficit has to be reduced and interest rates have to be increased for the purpose. In addition, Pak currency needs to be depreciated to a certain extent. Its parity cannot remain stable if prices in Pakistan are increasing at a much faster rate than our competitors and trading partners; the authorities cannot avoid the day of reckoning if the present trends in the external sector continue.

SALIENT FEATURES OF EXPECTED BUDGET
2006-07

The budgetary PSDP of the federal government is expected to be Rs. 350 billion which is 172.8% higher as compare to last fiscal year and out of which Rs 100 billion would be allocated for on going provincial projects which is Rs 68 billion or 47% more than the last fiscal year budget.

The major emphasis in the proposed budget 2006-07 development programmes are on the following sectors.

* Rs 25 billion would be set up for Khushhal Pakistan Fund and Khushhal Pakistan Programme II & I, which is 47.75 % more than the last fiscal year.

* Revenue target would be Rs 860 billion, which is 21% or Rs 150 billion more than the revised estimates.

* Rs 10.5 billion were owed to the health sector in fiscal year 2005-06 and Rs 10.2 billion is expected in the forthcoming budget.

* 11 percent increase in the defence budget for the 2006-07 fiscal year, fixing the total allocation at Rs 248.250 billion, which is Rs 25 billion more than the ongoing year's allocation.

* The government has decided to commit at least four percent of GDP from 2.7% education from the next financial year. Around Rs 12.3 billion will be spend on higher education.

* The provinces would possibly get Rs.327 billion during next fiscal 2006-07 as provincial share in the federal revenues against the 284.310 billion in the current fiscal year 2005-06. The share of Punjab would be 165.100 billion in next fiscal against the existing 143.566 billion of current fiscal, the share of Sindh would be Rs.99.369 billion against the existing 86.408 billion, NWFP would get Rs.39.259 billion against the existing Rs.34.139 billion and Balochistan will receive Rs.23.205 billion in the next fiscal as compared to the existing share of Rs.20.205 billion.

* Around Rs 799 million are setup for petroleum and natural resources, which is 73.65% more than the last fiscal year.

* In next fiscal year Rs 9.17 billion are allocated for agriculture, which is 0.44% higher as compare to on going fiscal year.

* In FY06 Rs 35.63 billion allocated for water and power. In FY07 alone Rs 36.47 billion are allocated for water, which is a good sign, in resolving the water issues and Rs 14.37 billion are setup.

* Poverty reduction and social sector related expenditure with an allocation of Rs 110.4 billion for FY07, which is Rs 47 billion more than the current fiscal. It is projected that more will be spent on this sector as President & Prime Minister shown great intension in plummeting poverty.

* Rs 3.74 billion allocated for port and shipping for fiscal year 2005-06 and it is expected that there will be a decline of Rs 1.74 billion for upcoming budget.

* There is a turn down in the proposed budget of railway of about Rs 10 million as compare to FY06 (Rs 9.8 billion).

* On transport and communication, the planned budget is Rs 42.6 billion, which is Rs 9.8 billion more than the present financial year.

* Rs 3.4 billion are proposed for planning and development division, Rs 20.5 billion for energy, Rs 42.6 billion for water resources development, Rs 98.6 billion for infrastructure development sector, Rs 9.5 billion for Kashmir and Northern Areas and Rs 7.1 billion for the Pakistan Atomic Energy Commission for up coming financial year.

* Rs 7.1 billion are planned for finance division next economical year, which Rs 10 million lesser as compare to ongoing fiscal year.

* The Federal Government will seek foreign loans worth of approximately over 64 billion rupees in the next fiscal year for the early completion of a number of projects and programmes related to different Federal Ministries and Provincial Governments. The federal government would provide 26.67 billion to provinces while 37.50 billion rupees would be allocated for different ministries and divisions.