BUDGET 2008-09: A CHALLENGE FOR THE NEW REGIME?
May 26 - June 01, 2008
Challenges bring with them opportunities. The new regime would do well to grab these opportunities rather than to harp on the old theme of "inherited problems". The analysts and critics of the past regime have said much and written too much about the "failed" economic policies of the past rulers. The new set up shall have to do some sifting through the heaps of these verbal and documented assertions to find material for its future economic framework in general and budgetary recommendations in particular. The problems and the solutions staring them in the face are briefly discussed here below.
THE EXTERNAL PAYMENT PROBLEM
The huge trade deficit of $12.740 billion, during the first ten months of the fiscal year 2007-08, and a corresponding current account deficit of $ 11.586 billion during the same period is one of the major worries for the charge takers. Looking back at the last two fiscal years, when the current account deficit of $ 6.878 billion during FY 2006-07 and $5.683 billion during FY 2005-06 was taken as the natural outcome of a growing economy, the whopping rise of 75% in the current account deficit for the FY 2007-08 is something out of the ordinary. It belies in clear terms the cause and effect relationship theory in a high-growth scenario particularly when the other macroeconomic indicators do not promise much. The higher oil import bill with a 47% increase during the first 10 months stood at $ 8.7 billion. According to the State Bank figures, Pakistan has received, during the period of 10 months (July-07 to April -08) $ 3.5 billion on account of foreign direct investment and $ 5.4 billion on account of foreign remittance. Up till the previous year, the dollars received through these two sources were sufficient to take care of the external payment. The unprecedented oil price hike during the last one year, when the prices were more than doubled, has done immense damage to the growing economy of Pakistan. With the large oil import bill, the trade deficit has ballooned up to such an extent as to outsize the foreign funds inflow package. Moreover, we are in a double squeeze position. Besides distorting our external account position, the hike has triggered worldwide demand for dollars and in consequence weakened the Pak Rupee. Having been unable to make any progress on the export front, we are now left to feel the back breaking negative impact of the weakening Rupee. The situation is likely to add a few billions to our external debt liability on one hand and fuel inflation on the other.
The State Bank, in its quarterly report covering economic performance for the first six months (July to December, 2007) had revised certain economic indicators vis-‡-vis the original budgetary targets set by the government. According to the said revision, the trade deficit for the whole year should be $ 15.4 billion as against government target of $ 13.4 billion. With the 10 months" actual figure of $ 12.740 billion, the SBP-revised target seems to be realistic, due mainly to the steep increase in oil prices which at present show no signs of abating. Even if the prices stabilize after some time, they are not going to come down to the 2004 level of $ 50 a barrel. So, we will have to set our own house in order. The problem is of gigantic proportions, but the solution is there. What is required is the will to act in fairness to this country and the masses. First of all, we should immediately put a ban on non-essential and luxury items thereby cutting the import bill to a reasonable size. The resultant decrease in the custom revenues can be made good by overhauling our tax system on a realistic basis and in line with the policies of other developing Asian particularly East Asian economies. Next, to boost our exports, we should shift our focus from service sector to the industrial sector in an objective manner and without having to depend too much on any of them. Further, the country will have to drastically reduce its dependence on oil by investing in gas projects and shifting focus from oil-based to coal-based and hydro energy projects. Last but not the least; now, when the country has completed its transition to the full democratic form of governance, we should strengthen our relations with the outer world making them believe that our growing economy holds great promise for their entrepreneurs and investors. At this critical juncture, we need more investor-friendly policies to attract both foreign and domestic investment. The idea of capital gain tax on stock exchange transactions floated by the resigning finance minister should be dropped forthwith. It will do more harm than the good. Already under bearish spells, the stock exchange might go into a tailspin thereby driving away even the sideliners who may opt for some alternate speculative market, may be currency or commodity. The exit of money from stock exchange to real estate, currency or commodity markets brings misery to the poor segments of the society. Our good governance should send signals of stability to the overseas Pakistanis to maintain and even increase the inflow of foreign remittances. Reduced imports, robust exports and a constantly increasing inflow of foreign funds will more than suffice the external payment demands. Let us hope that the budget document takes good care of these points.
This problem takes the garb of a complex proposition as the present situation has been caused by a number of factors both of external and internal bearings. The spiraling inflation and exorbitantly high food prices are the result of world inflationary trends and rising international food prices on one hand and the failure of domestic economic and administrative policies, on the other. The fact that the flour prices have almost doubled during the caretaker and the new-born democratic eras does not reflect favorably on the perception that the previous regime is responsible for all the evils of the society. The rice prices have also gone up by 40 to 50 percent during the last 3 ñ 4 months with the pulses also going hand in hand with the rice. The new government is answerable to the questions the poor people of this country are presently whispering in one another's ears. These questions will definitely be asked in a louder tone after the budget. This is the defining moment for the new set up. This time they will have to show not to the elite and civil society but to the common man of this country that democracy in its worst form is better than the dictatorship in its best form.
The short term solution to the poverty problem is the targeted subsidy to the very poor to provide them sustenance and immediate withdrawal of all unjust concessions to the rich. Export of rice should be banned forthwith at least for a period of two years. Our rice output is almost double the domestic demand. The export ban coupled with adequate administrative measures should bring the prices down to a great extent. People should be encouraged to use more rice to lessen pressure on wheat production. After two years, the situation may be reviewed and the government may allow export of superior quality rice only. The import duty on essential food items should also be drastically reduced to control food inflation. Any further increase in petrol prices must be avoided or else it will result in a fresh wave of price hikes. To face the onslaught of rising petrol prices, the affairs of oil marketing and refining companies be put in order and all unfair margins, deem duty etc. be rationalized and even scrapped where required. The suggested measures are not fairy tales. With slight variation (or even no variation) these measures have been taken by India to provide immediate relief to its people.