SALIENT FEATURE FOR THE BUDGET

Fighting food inflation in absolute priority

A.M. TALAH
June 04 - 10, 2007

The budget for the fiscal 2007-08 [FY-08] is likely to be presented in the parliament on the 8th or 9th of June, 2007.

As per media reports, the total outlay of the FY-08 budget will exceed Rs 2 trillion as against Rs 1.5 trillion for the current fiscal [FY-07]. The tax revenue collection target is to be fixed at over Rs one trillion as against Rs 835 billion for the current fiscal, which is likely to be exceeded by the close of the fiscal. The print media (of 26th May) indicate that (a) the Ministry of Finance (M/F) wants to fix the tax collection target for FY-08 at Rs 1.5 trillion while the Central Board of Revenue (CBR) is agreeable to Rs 1.15 trillion only and (b) the planning division wishes to put the development spending at Rs 549 billion [as against Rs 435 billion for the current fiscal] while M/F wants to have it at Rs 500 billion.

What will be the features of the FY-08 budget? But before examining that let us have a look on the performance of the current fiscal viz-a-viz the most important aspect affecting the common man. The inflation (CPI) target was fixed at 6.5 per cent but by now, it is 7.8 per cent in April, 2007 (12 month moving average). [It may be added that inflation during FY-06 was 7.9 per cent]. The food inflation at the end of April, 2007 is 9.7 per cent . State Bank of Pakistan's (SBP's) forecast is that by the close of the current fiscal, the inflation is likely to be settled at 7.5-7.8 per cent [SBP third quarterly report]. But the recent sharp upward trend in the prices of food items like milk, both fresh and powdered/packed, wheat flour, edible oil, vegetable ghee, tomatoes etc. indicates that by the close of the current fiscal, food inflation may exceed ten per cent and overall CPI would accelerate to over 8.5 per cent. The food inflation forms 56.1 per cent of the CPI [SBP third quarterly report].

While presenting the last budget, so many administrative measures were announced to keep the food inflation under control which included increasing the number of utility stores very substantially and to give franchise for utility stores to private individuals/organizations so that common man may have easy access to these stores which were supposed to sell the necessities of life at competitive rates. This, however, could not happen and the proposals merely stood buried in the governmental files. The SBP's tightened monetary policy introduced in July, 2005 could affect merely the 'core inflation' which excludes food and fuel oil. If we take out 56.1 per cent food component and at least 10-11 per cent fuel oil component from the CPI, it (core inflation) will comprise 33-34 per cent of the CPI. Can deceleration in 1/3rd of the CPI have any real impact on the lives of common men?

Another important aspect of the current fiscal is bourgeoning external trade deficit which has reached $ 11 billion during the first ten months of the current fiscal. It is partly met by the workers' remittances and partly by the foreign investment- both portfolio and direct. The situation will worsen in the fiscal FY-08 when the moratorium on repayment of some portion of the re-profiled external debt will be over and there will be increased pressure on the external resources on account of repayment of such debt.

What one can foresee; the proposed budget for FY-08 will be merely a 'stereotype' one as during the last few years and this time too, we see a conscious effort on the part of the economic managers to protect the interests of the higher echelons of the society. In this context the Prime Minister has already announced much earlier that the capital gain on share trading will continue to remain exempt in FY-08.

Apart from that, some influential lobbies such as the textile lobby, will pressurize the government to seek more financial concessions. At the time of announcement of the budget for the fiscal FY-07, the government had initially refused to accommodate the textile lobby on the plea of resource constraint. But within a fortnight, Rs 50 billion package was approved partly in the shape of subsidy in the interest rates on loans-both long term and short term; even the high priced long term loans were allowed to be swapped with low prices ones and partly in the shape of 6 per cent cash rebate in the name of 'research and development'.

The voices are some times raised by the business circles for the devaluation of Pakistan Rupee. This ascribe had examined the impact of Rupee devaluation on imports/exports during 1972-2005 which was published in 'Business Recorder' on the 3rd April, 2006. The devaluation did not help bring equilibrium in the external trade by increasing exports and reducing imports. It merely increased the 'imported inflation'. SBP Governor is also not in favour of it. Hence this may not be considered in the budget for FY-08.

The health/education allocations during FY-07 were meager at 0.7 and 2.7 per cent of the GDP respectively. There was an 'Information Technology (I.T)' euphoria half a decade back when Dr. Ata-ur-Rahman took over the reins of higher/ technical education. It was proposed that I.T. parks will be established in large cities and the I.T. institutes of the world class will also be created to train the youth so as to ensure export of soft wares and to acquire 'outsourcing' business in the field. Nothing of the sort happened so far and our annual foreign exchange earning under this head may not exceed $ 100 million but India is earning $ 31billion annually [earned during 2006-07] from it. It may be argued that India had moved ahead in the field much earlier but it does not make a sound argument as we have to move faster to catch hold of the time gap. The FY-08 may provide more funds for health / education sectors but such allocations may still be inadequate having regard to the genuine needs.

There has been a lot of talk about inflow of Foreign Direct Investment (FDI) / Foreign portfolio investment (FPI) as we are using the money to meet the external trade/current account/ balance of payments imbalance. But it is not a prudent policy to meet current deficit through FDI or FPI. FPI is not a dependant source of foreign exchange and it is globally recognized that it comprises 'hot money' entering/leaving a country at any time endangering the vulnerable external account. It may be recalled that in 1996-97 Far-Eastern economic crisis, FPI was one of the causes which broke the backbone of the 'Asian Tigers'. To demonstrate/ propagate the FPI inflow as efficiency and success of our bourses is highly misplaced.

As for FDI, there are two types of inflows: (a) privatization proceeds and (b) inflows for new projects. In the privatization, inflow is a one time operation while it creates permanent liability on account of remittance in foreign exchange of profits earned in Pakistan rupees by the foreign buyers. It is thus not a sustainable proposition as it neither adds anything to the GDP nor does it create more employment opportunities; rather the foreign buyers retrench the old employees for maximizing their profits. The FDI can prove sustainable only when it is for establishment of export oriented or import substitution industries so that not only the export earnings cover the outgo on account of profits but also add something to the country's GDP/foreign reserves or in the case of 'import substitution' industries, cut the import bill providing some relief in the external sector, besides creating fresh employment opportunities. Our economic managers' policies in this context are misplaced because they are inviting FDI in the import oriented sectors like food/beverages/cigarettes telecommunications which is not only increasing country's import bill but also inflating 'invisible remittances' bill.

One will not witness any FDI in the export oriented manufacturing / import substitution sectors like fertilizer or electricity generation/distribution sectors [not a single megawatt has been added in the electricity sector since October, 1999 take over) although the country continuously faces load-shedding and is also spending billions of dollars on the import of fertilizers.

The FDI policy, therefore, needs to be changed in the next budget to tailor it to the country's real requirements. Can this really happen? The answer is certainly in the negative. This is partially because of strong nexus which seems to have been created between the policy makers and the 'vested interest'. For instance, a Pakistani firm, which is now co-owner of the KESC with the Saudi Arabians, has been permitted to install a 1000 megawatt coal fired power house. How these owners are running the KESC and fulfilling the obligations under the contract is obvious to the citizens. How can a firm incompetent enough even to run an already installed generation/distribution system of 1200 megawatts or so be expected to install a new 1000 megawatt project is a big question mark? Another instance can be the government's decision to sell the Pakistan Steel Mills land at Rs 7 million per acre. The Steel Mills is occupying 4500 acres of land and as per government's own fixed price, it costs Rs 31.5 billion. Then how does the sale of steel mills for Rs 22 billion with all its land and assets [coupled with the return of Rs 15 billion by the government for staff exodus] sound?

As mentioned earlier, as per the CBR, the tax recovery target for FY-08 will be Rs 1.15 trillion- an increase of Rs 315 billion over FY-07 target. The development budget is expected to be raised from Rs 435 billion [FY-07] to Rs 500 billion for FY-08 depicting an increase of Rs 65 billion. Will it be possible for the economic managers to increase the development budget by that proportion. Obviously, it seems possible.

FY-08 will be the election year and will see the political meetings and rallies. Such meetings and rallies-particularly those to be addressed by the President-will traditionally involve pay outs from the government exchequer even though the government may continue to issue denials. Will the electioneering process will leave any additional amount for development expenditure?. Apart from that, the first half of FY-08 will be consumed by electioneering process. Will it be possible to pay attention to the development process in such circumstances? On the whole, therefore, the development activities will be slowed down in the ensuing fiscal and the full utilization of the budgetary allocation on the planned development projects seems impossibility.

The major item of imports is petroleum/petroleum products. There is an urgent need of devising ways to cut expenditure on this account and the budget for FY-08 should at least be reflective of preliminary planning in this respect instead of demonstrating the prosperity of the nation based on the statistics of sales of cars/motorcycles and the cell phones. This can be done by introducing mass transport system in the big cities of the country so that use of cars/bikes by the individuals is curtailed to the maximum possible extent. This will reduce fuel consumption in a big way.

There has been a lot of talk during the last two decades for erection of 3-4 mass transit corridors in Karachi; the first one covering Sohrab Goth-Merewether Tower sector but nothing concrete has happened and during this period India has successfully erected underground rail system in about half of the capital city Delhi. About two years back, shuttle train service was revived between Karachi city and Landhi/Pipri but it has been discontinued on the flimsy ground that the party to whom contract for selling the tickets was awarded has exhausted the stock of the tickets. There has also been a lot of talk about the revival of the Karachi Circular Railway. Nothing concrete came out in this context too. One feels that the proposal for erection of Sohrab Goth-Merewether corridor was merely a 'lollypop' because it does not seem feasible from the point of view of environment as well as public convenience because at Teen Hatti, Lyari express way is passing over the main road at the height of 18 feet and as such the proposed corridor at this junction can be erected at the height of 36 feet. The question is at what point the proposed corridor will ascend [at Liaquatabad Dak-khana?]/ descend [at purani numaish?] and how will the commuters climb this four-storey building height of 36 feet at 3-4 stops falling between these points and what about the inconvenience to the residents on both sides of the corridor?

One feels that some alternative corridors should be quickly planned and implemented and in the meantime arrangements should be made to revive Karachi city-Landhi/Pipri section of the Railways and to reopen the Karachi Circular Railway. If such projects are not quickly taken in hand at Karachi/other large cities, our entire export earnings will hardly suffice to cover the fuel oil import bill in a few years' time.