MAKING PEOPLE FRIENDLY BUDGET!
A CHALLENGE TO POLICYMAKERS
Apr 2 - 8, 2012
The government has asked the opinion leaders in the society including local trade bodies, representatives of the corporate sector, and foreign investors to send their recommendations and proposals prior to give a final shape to the forthcoming budget 2012-13 expected sometime in May 2012.
The issues currently perturbing the minds of the private sector, which most of the trade bodies are pointing out to the policy makers, include the excessive borrowings from the banking sector, which on one hand are crowding out the private sector while contributing to the high rate of inflation and the high mark-up rates on the other, which are counterproductive to economic activity. Another issue giving tough times to the trade and industry is of course the extremely poor state of gas and power supplies, which have almost brought a huge number of industrial units to a halt specially in Punjab, while the unabated law and order problem is yet another serious concern for both private sector and the government, impairing the endeavors to improve the pace of economy.
The government managed to contain fiscal deficit at three per cent of GDP in the first seven months of the current financial year with the support of tight fiscal management when the current expenditure was estimated at Rs1,345 billion, 52 percent of full year budgeted expenditures of Rs2,767 billion, which could be described well within the target. However, maintaining this grip is difficult on the back of deteriorating law and order situation, which adversely affected performance of the private sector.
In the current political scenario, the state of relations with the United States is being watched for its potential impact on foreign exchange inflows in respect of coalition support fund. Currently, the two governments are negotiating the NATO supply issue under the heightening political noise.
The Pak-US relations would have an impact on the forthcoming budget, said a leading industrialist. It may be noted that relations with US had reached its lowest ebb following the NATO attack on Pakistan's border in late Nov also affecting exchange rate as Pak Rupee has depreciated 4.4 percent till to date.
Under the tight economic situation, the government's appetite for funds from domestic sources has increased. The government's share in banks' lending in last eight months reached 71 per cent.
Informed sources in banking circle said apart from budgetary support, the government also sought loan of Rs141billion on the books to repay outstanding power sector dues.
It is interesting to note that 90 per cent of total investment of the banks is held in government securities. While commodity financing has started to show its seasonal rise, there is a lower textile sector's working capital demand due to depressed cotton prices and banks' selective focus towards fixed investment financing would keep private sector credit growth lackluster.
Although the excessive government borrowings from the banking sector contributed to inflationary pressures besides keeping up the mark up rate, its positive impact was also on banking sector in the sense that it helped banks for continuing risk aversion primarily due to safe and secure investment in government papers. It also helped banks to reduce non-performing loans (NPL) cycle. It may be noted that NPL accumulation in 2011 halved to Rs59 billion while gross NPLs now stand at Rs607 billion or 16.2 per cent of outstanding loans.
The banks are taking benefit of revised regulations, which have kept loan loss coverage ratio stable at 67 per cent for the year. Meanwhile the central bank has relaxed classification requirements for the overdue loans for banks where they will only need to suspend income on such portfolio and private credit remains dearer that indicates further slowdown in NPL accumulation in the months to come.
On one hand, the bank spreads dropped by another 7 basis points month on month to 7.3 per cent in February 2012 as the lending rates dropped by 10bp while on the other hand, deposit cost inflated by 3bp to 5.85 per cent during that month. Hence, the banks' spreads dropped by 58bp from the peak of 7.88 per cent in July 2011 following discount rate cut by 2ppt and conversion of expensive power sector TFCs into PIB/T-bills in November 2011.
As the trend continues to unfold, it is expected that banks spreads would ease cumulatively by 70-100bp for big-5 banks to fully reflect the effect of policy rate cut over the coming few months. That tight liquidity position of banks heating competition in deposit market may further accelerate the trend, sources said.
Containing the ever-increasing oil and gas prices causing paralyzing affects on the economy and living standards of the low-income group is possible through developing alternative energy resources as well as conventional resources.
According to the informed sources, the government has framed a new energy policy, which is likely to be announced with the next budget. The stakeholders in the economy have demanded of the government to encourage speedy development of available resources through incentives in the forthcoming budget.
It may be noted that the production of natural gas increased by 328mmcfd and oil by 6742 barrels by March 2012 in the country. With these increases, the total production of gas rose to 4339 mmcfd from 4011 mmcfd in June 2011 while oil production ramped up to 72,411bpd from 65,659 bpd.
Though the improvement in oil and gas production was a good sign, yet it does not reflect the actual energy potential of the country that could have gone up to manifolds provided some hitches due to delayed announcement of new exploration policy hampering the real growth rate were removed.
Under the prevailing situation of acute energy shortage causing serious impact on domestic market as well as export oriented industries, there is urgent need of speeding up exploration and production to save precious foreign exchange waning on costly oil imports.
According to the informed sources, the regulatory issues post-introduction of 18th Amendment, law and order situation in select areas of concessionary blocs, and backlog of incomplete wells have restricted the drilling activity in financial year 2012.
At the moment, entire exploration activity is concentrated in onshore area which means off-shore drilling activity also needs to be activated.
There seems an urgent need for notification of E&P Policy even before the budget or at least at the time of budget to provide the guideline on oil and gas pricing on new areas that may pave the way for further increase in E&P activity as early as possible to catch up the growing demand oil and gas in the country.
Sources said the E&P industry has drilled a total of 14/24 exploration/development wells as against the targets of 31/45 wells so far in the financial year 2012.
Special focus is needed to accelerate development of energy resources, gasification of Thar coal for power generation, completion of LNG terminal at Port Qasim and construction of Iran-Pakistan gas pipeline project to give the much-needed relief to energy-starved economy.