Budget discussions in the parliament reveal that the government is aware of the public discontent over its financial plans. In my opinion, the budget will equally hurt the people and the government, but I acknowledge that it would not have been any different if it were presented by a PTI or a PPP government. The PML-N leadership is feeling the heat because it had raised the expectations of its supporters of “economic miracles” during its election campaign.
Pakistan is an energy-starved economy with almost 10 percent fiscal deficit, persistent current account deficit, alarmingly low level of foreign exchange reserves, disappointing tax to GDP ratio, and low levels of investment and savings to GDP ratios. These macroeconomic realities hardly leave any fiscal cushion for the government to be innovative or to take popular measures. To some extent, this argument can be applied to the last five budgets presented by the PPP as well. Despite a downward revision, the FBR could not achieve its revenue target. Manifestation of mal-governance – chronically ill Public Sector Enterprises, crippling energy sector subsidies, the power sector circular debt, less than budgeted external assistance, and non-realization of plans such as income from the auction of 3G licenses – resulted in a huge fiscal deficit during 2012-13. Most of this deficit will spill over to the next fiscal year, making it difficult for the PML-N government to bridge the budgetary deficit of Rs 1,671 trillion (including Rs 20 billion for a 10 percent increase in federal employees’ salaries). Against the federal revenue of Rs 1,918 billion, the government has proposed expenditures of 3,611 billion, leading to a shortfall of 45 percent. This shortfall will soar because the provinces have also presented deficit budgets, further complicating the economic problems in Islamabad.
There are two types of expenditures – current expenditures and the Public Sector Development Program (PSDP). Current expenditures include interest payments, pensions, defence affairs and services, subsidies, and the running of the civil government. The Public Sector Development Program caters to the development agenda.
Interest payments, defence services, and the running of the civil government cannot be curtailed. These three make more than 75 percent of the federal expenditures (which are 20 percent higher than the total federal revenue). It simply implies that the PSDP and parts of the current expenditure would have to be financed both by external and domestic borrowing.
The budget document reveals that the government is planning to borrow $5.7 billion from external sources and Rs 1.48 trillion from domestic financing (mainly through commercial banks and public debt). Any external or internal shock would not only increase the need and volume of the loans, but also worsen the economic structural imbalances. So what is the possible way out?
An IMF post program monitoring mission is already due in Islamabad. Due to severe economic vulnerabilities, the government has indicated that it will negotiate a bailout package. However, the Fund would be reluctant to offer one until the new government takes some meaningful measures for structural reforms. Partly due to its allies, especially the MQM and the JUI-F, the PPP government could not fulfill its commitments with the Fund on the documentation of the economy, General Sales Tax (GST) reforms, power sector reforms, and Public Sector Enterprises reforms. It is in this context that the federal budget was preponed and Ishaq Dar approved all measures which could be sold to the visiting IMF mission as Pakistan’s “front loading” on reform agenda.
All forms of “adjustment taxes” proposed in the federal budget will help in the documentation of the economy, and people will be encouraged to register with the FBR. Likewise, an increase in the GST to 17 percent is PML-N’s commitment to GST reforms. The government may not stick to subsidy reduction due to political compulsions, but it has announced the withdrawal of non-targeted energy subsidy and has already increased the power tariffs to reduce the circular debt. It has also announced major reforms in Public Sector Enterprises (PSEs) and plans to either privatize them or run them through public-private partnerships. The continuation of the Benazir Income Support Program (BISP) – with a new name – will also suffice IMF’s prerequisite of having strong social safety nets to mitigate the adverse effects of structural reforms.
IMF or no IMF, these measures will help put Pakistan’s economy back on track in the medium to long run. These surgical measures are extremely painful but are essential for curing our bleeding economy. But the pain of this treatment should not be life threatening for the masses and that is where social safety nets are extremely crucial. The PML-N has been criticizing the political misuse of BISP by the PPP. It remains to be seen how smartly the PML-N handles the program.
The privatization of PSEs or running them through public-private partnerships will not fulfill the purpose unless regulatory bodies are strengthened and depoliticized. Turning Pakistan Railways into a corporation would not automatically resolve its issues, unless we learn lessons from the failure of another corporation, the PIAC. Putting the right persons in the right jobs, especially in the boards of directors, is of utmost importance.
On the energy front, the government would have to raise Rs 500 billion through T-bills (public debt) to clear the circular debt backlog. However, the circular debt will not be controlled until we start allocating fuel to efficient generation plants (independent power producer are three times more efficient than government generation companies), minimize transmission and distribution losses, and in the long run change the fuel mix for electricity generation. Fortunately, these steps don’t require a lot of money, only strong political will for energy governance reforms.
After the new NFC Award, there is a significant increase in the share of the provinces. Almost 58 percent of the federal divisible pool now goes to the provinces. However, the provincial tax to GDP ratio is still less than 0.5 percent. To me, the provincial budgets were a test of the PML-N, the PPP, and the PTI’s resolve to reduce Pakistan’s economic vulnerabilities. Unfortunately, all three provinces presented deficit budgets (Balochistan had not presented its budget at the time this essay was written). None of them seems serious in improving the provincial tax to GDP ratio. This fiscal irresponsibility of the provinces will increase the economic miseries of the federal government. These miseries can only be resolved through political wisdom.
The PML-N government may not be very successful in bridging the fiscal deficit in the short to medium run. It cannot reduce power or gas tariffs through the budget, because power tariff determination lies with NEPRA, and that of oil and gas with OGRA. But the government can certainly win back the trust of the people and the international community through transparency and accountability. This is where a new parliament can make a difference.
This article was originally published at: The Friday Times
The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.