June 22 - 28, 2009

The government and all those having access to power corridors insist that the federal budget 2009-10 aims at reviving economic activities in the country. However, public at large does not mince their words in calling it a directionless and eccentric budget far from economic realities. It seems that the economic managers have realized their limitations in mobilizing domestic resources and is relying excessively on the borrowed money. The real point of concern is that in the absence of any recovery plan, the situation is likely to get from bad to worse.

Therefore, a dispassionate evaluation of the budget is necessary. The general perception is that the federal budget for financial year 2009-10 has been prepared keeping in view the IMF conditionalities, which is partly true. The Fund has to be kept fully aware of the initiatives being taken and their impact. If the outcome is as desired the pressure would be low but in case the government fails it may still get the funds but the conditions would become more stringent.

Some of the critics are a little surprised at the attitude of the donors who have been more generous and even go to the extent of calling it a 'debt trap' which would ultimately result in Pakistan loosing its sovereignty. They also term it a vicious circle whereby the country will be forced to borrow more to settle its debt servicing obligations. Others say that Pakistan is not alone facing a precarious situation. Most of the developed countries have injected billions of dollars to save their economies from downturn. The attitude of lenders towards Pakistan is more supportive because of an elected government managing the affairs of the country. However, the overall consensus is that less attention is being paid to resolve some of the most contentious issues. Instead of finding the solution the previous government is being blamed for every thing, even those issues which have emerged during the present regime.

Coming to the good and bad points of the budget, the government has not only fixed an ambitious revenue collection but relied on taxing those already in the tax net. The worst example is imposition of 16% Federal Excise Duty on the four documented sectors of the economy i.e. commercial banks, insurance companies, port handling and brokerage. The rationale put forward is that since all other constituents of 'services sector' are paying this levy why the four chosen sector should remain outside the ambient of this levy.

Proposal to impose Carbon Tax has attracted criticism on two grounds. First being that the Supreme Court of Pakistan had instructed the federation to abolish Petroleum Development Levy (PDL). Lately, a nominal reduction in POL prices was announced to hoodwink consumers. Realizing that the government's stance is very weak, withdrawal of PDL has been assured by replacing it with Carbon Tax. Be carbon tax or PDL, POL prices are likely to remain higher and the government would also succeed in extracting about Rs134 billion from the users. Blatantly, it has been said that this tax was being imposed to meet the potential shortfall emerging from the withdrawal of PDL. Secondly, the government's intention is very clear. It does not intend to use the funds collected under this head on environment protection but bridging the budget deficit, arising mainly from lavish spending. While the non-development expenses are on the rise, the government is slashing PSDP allocations to continue its extravaganzas.

The whole world is experiencing recession, mainly due to the sub-prime loan crisis of the US engulfing all irrespective of rich or poor and developing or developed economies. Therefore, Pakistan cannot be an exception. However, the impact on Pakistan is neutral or at the best marginal. Pakistan's current economic downturn is mainly due to a number of other factors.

A review of the performance of the elected government shows two gross weaknesses: One is lack of governance capacity to execute. And second is an outcome of misplaced priorities, too many hands spoiling the curry and above all absence of decisiveness. Unless these weaknesses are overcome all the policies would turn redundant.

It is true that Pakistan faces some serious problems but these cannot be overcome by borrowing. Certainly the country did not need all that money which was borrowed. To revive economy of Pakistan the economic managers have to address a few basic problems.

The first and most contentious issue is accelerating GDP growth rate, which would in turn resolve most of the issues. The outputs of the key sectors i.e. agriculture, manufacturing and services have to be enhanced. Achieving higher production and productivity is not possible without ensuring uninterrupted supply of energy products at affordable prices. It is on record that private sector credit growth has lunged and creation of new productive facilities is at the lowest low. Funds are scarce and cost of fund colossal. Political uncertainly is high and law and order situation most precarious. All these factors have made local investors shy. If the local investors are shy offering all the conceivable incentives to the foreign investors would be meaningless.

It is almost impossible to find a few positive points in the budget. Lauding record allocations for the PSDP is also meaningless. The track record shows that not more than one fourth of PSDP allocation could be used during the financial year ending on June 30, 2009. It was partly due to lack of capacity to undertake mega size projects and partly because of diverting funds to non-developmental activities.

It is true that sailing is not smooth. The government must come up with a home grown plan because following the IMF prescription blindly could plunge the country deeper into economic downturn. All the efforts should be aimed at accelerating GDP growth rate. Efforts should also be made to create demand for efficient utilization of the existing facilities and encouraging investment for the creation of new productive facilities.