TRYING TO CHASE UNREALISTIC TARGETS
SHABBIR H. KAZMI
June 22 - 28, 2009
In its second federal budget the present regime has announced an outlay of Rs2.48 trillion as against an estimated net revenue receipts of Rs1.37 trillion, resulting in about one trillion rupees deficit . While the proposed outlay deserves appreciation the only concern is ability of the government to mobilize resources to support the spending. Excessive dependence on foreign resources is another serious concern because it would push the country once again into debt trap, forcing it to borrow more to meet its debt servicing commitment.
The revenue target has been fixed on the basis of GDP attaining 3% growth rate and three of its constituents achieving the desired targets. However, to begin with many of the critics are skeptical of achieving the targeted GDP growth, mainly because of dismal performance of the large scale manufacturing sector. If the economic activities remain subdued FBR related collection is also feared to remain below the target.
One of the major sources of revenue, sales tax is also dependent on the purchasing power of the people, not likely to improve substantially during the next financial year. Inflation is likely to remain high because of higher input cost and poor capacity utilization of the manufacturing sector. The only silver lining is a robust agriculture sector also supported by the services sector.
According to some of the critics Pakistan's real problem is not the low revenue collection but the higher expenses, mostly falling in the category of non-developmental expenditure. One of the examples is pathetically low utilization of allocations made for Public Sector Development Program. It is claimed that for year 2009-10 the government has allocated record funds but two of the issues continue to haunt the general public 1) capacity to come up with projects having the potential to affect life of masses in any significant manner and 2) timely completion of the projects within the allocated budget.
The general perception of the critics is that the government will not be able to achieve the target. This impression is based on this year's experience. First withdrawal of tax has already been announced, withdrawal of Carbon Tax from CNG. Insurance companies and takaful operators have already termed hike in FED to16% from 10% unjustified. They have already made the move and others are expected to follow their foot prints. This means that achieving Rs1.4 trillion target becomes doubtful.
Achieving corporate tax collection target also seems difficult because of declining profit of listed companies. Rising provisions against NPLs and impairment cost is likely to reduce profit and in turn tax liability. Earnings of textile and sugar mills are also likely to remain under pressure. The concessions given to telecom sector are likely to reduce its contribution to the overall tax collection.
In such a scenario it is imperative that the government should try to curtail non-productive expenses. Though, it is a remote probability the economic managers have no other option. The load of debt servicing is expected to increase mainly due to rupee depreciation this year and due to enhanced debt servicing resulting from the current colossal borrowing.
The government has yet to announce two important policies, Monetary Policy and Trade Policy. Analysts are suggesting 250 basis points reduction in July and another 250 basis points in October. As usual some of the quarters are suggesting the government to follow a cautious approach because sudden reduction in interest rates could hike interest rate, while others insist immediate reduction in policy rate.
Some analysts say that reduction in interest rate alone cannot boost private sector credit offtake. Tranquil law and order situation is a prerequisite for boosting investment. Creation of new productive facilities has the potential to boost GDP growth rate, bridge trade deficit, create new job opportunities and exportable surplus.
Lately, Pakistan government has been negotiating for the greater market access in the US and the EU markets. However, Pakistan faces two serious issues. Two of Pakistan's major buyers are willing to give aid, loan on concessional terms but are reluctant in allowing greater access.
However, many of the critics say even if Pakistan gets greater market access it would be of no consequence. The key reason for Pakistan's dwindling exports is eroding competitiveness of the local manufacturers not the market access. Therefore, the government should immediately come up with policies capable of restoring competitiveness of the local manufacturers.
The proposed budget has attracted a mixed response. While some have termed it the best in the given circumstances others are critical of its weaknesses. Though, the global economic scenario remains depressing one have to be a little optimistic while evaluating the policies.
However, one just could not resist from saying that most probably a better budget could have been prepared through consultative process. The economic managers should have come up with a home grown plan rather than towing the line of International Monetary Fund and relying heavily on the borrowed funds.
The citizens must have faith in themselves and the potential of this country. Introduction of right policies and following these in letter and spirit can make Pakistan one of the fastest growing economies of the world.