Daily Times

Brimming with excitement, bordering on the histrionics that one normally associates with political rallies, Mian Nawaz Sharif’s trusted federal finance minister, Ishaq Dar, presented what he insists is a “poor-friendly” federal budget in the National Assembly on June 5. Critics do not share the palpable enthusiasm of our man for all seasons; they say that cosmetic taxation aside, this is a “pro-rich budget”. The bureaucratic culture endemic to the finance ministry does not encourage “out of the box” thinking. The fundamental requirement of the ongoing International Monetary Fund (IMF) programme is a reduction in the fiscal deficit. Based on rather fragile and unrealistic assumptions, we already saw a series of mini-budgets in 2014-15 to meet the quarterly quantitative performance requirements of the IMF. An Institute of Policy Reforms (IPR) summary noted rather sarcastically, “Budget aspirations can only be achieved by a combination of wishful thinking, involving over-optimistic projections and through the adoption of some creative accounting techniques.”

According to IPR, “Pakistan’s ranking of 107 in the Ease of Doing Business Index of the World Bank/IFC in 2013 fell in 2014 to 127; (b) our ranking of 146 in the Human Development Index of UNDP compares with 135 of India and 142 of Bangladesh; (c) The Global Competitiveness Index of the World Economic Forum (WEF) ranks Pakistan at 129, as compared to 61 for India and 109 for Bangladesh; (d) (Pakistan) is ranked below India in the Food Security Index by the Economics Intelligence Unit (EIU) of the London Economist, and (e) is in the ‘high alert’ zone of the Fragile States Index of the Institute of Peace, Washington.”

Any government unable to meet its expenditures using its own resources borrows from local and foreign lenders to bridge the gap (fiscal deficit), thereby increasing the public debt. A whopping Rs 1.596 trillion, almost two-fifths (39.03 percent) of the 2015-16 federal budget of Rs 4.089 trillion, will be allocated to public debt retirement and the payment of interest on loans. The government has to pay six billion rupees every quarter to the commercial banks for the circular debt of their local syndicate “power holdings”. Rs 111.219 billion will be spent on foreign debt servicing (interest payments). Repaying the principal amount will amount to Rs 316.37 billion with domestic debt servicing consuming Rs 1.168 billion. The combined amount of federal and provincial development expenditures of Rs 1.514 trillion for the current fiscal year exceed the outlay for the public sector development programme (PSDP).

The increase of taxation on unearned capital income and capital gains notwithstanding, many of the more radical proposals by the Tax Reforms Commission have not been adopted. These measures include the withdrawal of special tax privileges of VIPs, taxing the foreign income of residents and mechanisms to check transfer pricing. Indeed, some of the proposed measures will add to the cost of living of the poor. The more oppressive taxation and other measures have not been explicitly highlighted. Slashing subsidies to the power sector will mean a 15-20 percent increase in electricity tariffs, sooner rather than later.

Having mixed feelings about increased private investment, the business class feels that idle private capital is more likely to flow into trading, real estate and construction but not towards industry. Banks put most of their money into investment bonds instead of lending to the private sector, stunting growth. Only two banks, Allied Bank and Bank Al Habib, out of the nine topmost commercial banks tend to invest in the private sector. If banks do not take risks on the basis of projects and proposals, but continue to go the easy route of lending only to the government and those who do not need to borrow in the first place, growth and employment will remain a fantasy. This will force budding entrepreneurs to borrow from the informal sector, their businesses will remain in that sector indefinitely and the tax-to-GDP ratio will keep lagging. PPP stalwart Aitzaz Ahsan quoted figures showing a reduction of more than 100,000 in the active taxpayers’ list of 2013 from 2012. It is ridiculous that less than a million Pakistanis bear the burden of more than Rs 180 million in tax. This must change drastically as there is not much tax relief. The health insurance scheme and the Prime Minister’s (PM’s) youth programme will be received well by the people. Though under-utilised by six percent in 2014-15, the continued commitment to the Benazir Income Support Programme is welcome.

The PSDP of Rs 700 billion out of Rs 4.3 trillion (only 16 percent of the total federal budget) is nowhere close to what the economy needs. Serious infrastructure and social deficits retard economic activity and cause hardships to the people. With modest growth for the last seven years, the economy needs a strong stimulus of about Rs 1,000 billion. Yet, the PDSP is only about Rs 580 billion. Neither the Rs 100 billion provision for resettlement of Internally Displaced Persons nor the Rs 20 billion provided for the PM’s Youth Programme are investments; they are development expenditures.

With the PM having taken note, one can expect some positive changes. Water remains the biggest cause for concern, yet the federal allocation for the water sector has been reduced from Rs 46 billion to Rs 30 billion (by 24 percent). For a water-stressed, primarily agricultural economy, this is not only alarming but also disappointing. With severe law and order problems abating but continuing, what has been specifically allocated for the National Action Plan (NAP)? Why have funds not been earmarked for the National Counter Terrorism Authority (NACTA)? In the face of India’s latest arms acquisitions, are the defence allocations enough?

Emphasis should have shifted from stabilisation to the revival of the economy and providing significant relief to the people. Privatisation Commission Chairman Mohammad Zubair said that while the government was committed to facilitating the private sector to actively partake in the country’s development, the low private sector investment poses a challenge. Dr Hafiz Pasha says, “Successive governments have resorted to creative accounting practices to create illusions and the investment figures given in the Pakistan Economic Survey are exaggerated.” A back-handed compliment of sorts from Hafiz Pasha should enthuse Ishaq Dar: “Pakistan’s future holds the promise of very high returns if the private sector is persuaded to invest.” While our enthusiastic finance minister went overboard in claiming, tongue in cheek, that 2.5 million jobs will be created because of the new budget, the China-Pakistan Economic Corridor (CPEC) is a game changer that will certainly kick-start the economy. Budgetary woes aside, credit must go to Mian Nawaz Sharif and his foreign, economic and planning colleagues for CPEC.

The writer is a defence analyst and security expert