June 22 - 28, 2009

Pakistan People's Party elected government has presented its second budget for FY10 in the backdrop of uncertain economic and security situation. It seems that the government made lenders and donors happy in the budget in bet of improving economic indicators and nothing substantial has been done to relieve the poor.

The government has set ambitious economic targets for FY10 which are unlikely to be achieved in view of internal and external economic states. The government demonstrated that it is capable of achieving ambitious targets so that international donors would not feel hesitant in extending a helping hand to fill the fiscal gap.

FY09 proved to be a very difficult year for Pakistani economy where almost all economic targets were missed. Unabated inflation, galloping current and fiscal account deficit, declining investment and weakening exchange rate were a few problems faced by the government. This government is unlucky as when it took control of the economy, both internal and external environment were in their worst shapes.

The government had to take painful yet pragmatic steps to stabilize the economy, which was vital for promoting economic growth. Both fiscal and monetary policies were used in harmony to reduce aggregate demand with the aim to contain unrelenting current and fiscal deficits. The policies pursued by the government have started producing positive results at the end of FY09; overall average inflation in the current fiscal is estimated at 21%, projected to come down to 14% by end-of-June 2009 and trade deficit in the first ten months of the current fiscal was reduced by 12.3% over the same period last fiscal year and current account deficit has also decreased significantly.

It shows that the government was able to stabilize a few economic indicators to some extent and that how it wanted to initiate economic growth gradually reflects in this budget. In budget 2009-10, total consolidated expenditure (including that in the provinces) is estimated at Rs. 2897 bn and total revenue is targeted at Rs.2175 bn, thus leaving a budget deficit of Rs.722 bn, or 4.9% of the estimated GDP.

Total current expenditure is budgeted at Rs.2104 bn and development expenditure adjusted for net lending totaled Rs.793 bn. In development expenditure, the government has allocated Rs.626 bn for Public Sector Development Program (PSDP) - an increase of almost 50% over last year. Perhaps in the government's view this is going to invigorate growth in FY2009-10, as if they believe there is a relationship between the PSDP and economic growth.

Certainly any sort of expenditure will have some economic impact. I appreciate government's decision to allocate handsome amount for development but here the question arises how the government is going to spend it? On one hand war against militancy is in progress in northern areas along with security issues in Punjab. On the other hand, political situation in Baluchistan is ominous. Government will find it difficult to undertake development projects in both major provinces which will lead to partly non-utilization of PSDP. Secondly, our defence expenditure has been increasing and government has no other option whatsoever. Besides, tax base is narrow and can not generate enough revenue to meet our expenditures. Government will certainly revise PSDP, if not it will become root cause of macroeconomic imbalance in FY10.

The government has also increased allocation for Benazir Income Support Programme (BISP) to Rs.70 bn from Rs.34 bn under the head of development expenditure to support poor people. In outgoing year it could not consume only Rs22bn out of the year's allocation due to execution flaws and its authority issues between provincial and federal government which shows failure of the scheme. This time government should not repeat the same mistakes and instead of paying cash to needy, it should introduce the vocational training programmes which would help them in becoming self sufficient and alleviating poverty in long run.

The financing plan for fiscal deficit is quite interesting. Finances from external sources amount to Rs.312 bn. Rs.391 bn will be raised from domestic market and rest will be financed through privatization proceeds. Dependence on uncertain external source of financing is very risky. The government should have considered it before planning expenditures for FY10. And if, Pakistan does not receive external resources, then the government will seek further assistance from the lenders to meet the budgetary gap, which have already eaten up handsome chunk of revenue in debt servicing. The government will either float TFC or take finance from banking sources or both. Given the current risk profile of the country, foreign investors may ask for higher yields on TFC which will add extra burden on government. If government goes towards banking sources which are highly inflationary in nature, then it might disturb banks liquidity positions in the state where growth in private credit is recipe for revival of the economy.

It has been a dark side of the government's policies to generate revenue from a few existing sources. Same is the case in the budget, where main thrust of the government remained on further exploiting already and easily available source of revenue. The government has increased FED on bank and insurance services, WHT on imports was increased and salaried class was further burdened with IDP rescue tax. Government should broaden its tax base and bring agriculture profits in tax net where real wealth is concentrated to achieve ambitious target of 9.6% tax-to-GDP.

Pakistan is still facing challenges of stubbornly high inflation, declining investment and expanding budgetary gap. Government should move pragmatically to use its limited resources in effective and efficient manner to further stabilize the economy. Government should use fiscal and monetary policies in similar direction with an aim to lay down a strong foundation first and then to put the economy on growth trajectory by changing its policy stances.