Budget indicators and the PML-N
The government should understand that GDP growth sans job creation and livelihood security means nothing to the ordinary citizens
Prime Minister Nawaz Sharif made history by becoming the first democratically elected prime minister who has presented the fifth consecutive budget in the 70-year history of Pakistan. Although the Pakistan People’s Party completed five years of government, it had two prime ministers in that tenure.
There were a lot of expectations of the people and pressure from the party in the run-up to the general election that the federal budget 2017-18 would be an election-friendly budget.
This is the first, what we may call, independent budget presented by the PML-N government. The initial four budgets were prepared under the International Monetary Fund (IMF) programme. Therefore, in those four budgets, the conditions imposed by the IMF framework took priority in the budget-making process.
The PML-N government had to use its newly-found financial autonomy (after the successful completion of IMF programme) in a situation where the economy is stable compared to 2013, but it is still far from being sustainable.
Contributing to the lack of sustainability in the economy are, a) Trade imbalance hitting a historical low; b) Sharply falling remittances; c) Fiscal deficit (which for the first four years was slightly under control compared to the greater than 8 per cent in 2013 but it is again sliding up); d) Current account deficit (the budgeted target for 2016-17 got missed and it is already double); and e) Prices of petroleum products in the international market which are on the rise. The finance minister is wary of the situation.
In this context, a government that is doubtful regarding re-election gives a popular or election budget and goes on a spending spree. If the popular budget gets them votes, it is a win-win situation but if it does not, the successor government faces the brunt.
Looking at the current political scenario, the PML-N seems confident that it will be able to retain the status quo, if not better. Although they could not make governments in Sindh and KPK, they are still confident that they will be able to come back in the centre. This is the prime reason that the budget is not as election-friendly as was expected. Rather, it is business as usual and is prepared following the template used by earlier governments.
In this template, fiscal deficit is taken as an entry point. Successive governments have been trying to meet this deficit by inflating the revenues and deflating expenditures. They rely on indirect taxes as a major source of revenue. Whereas major expenditures can be categorised into 4 Ds — debt servicing, defence, day-to-day administration and development.
While it was historic that the prime minister could present the fifth consecutive budget, the mere fact that others could not achieve this milestone reflects the vulnerability of democratically-elected governments.
Like always, this time too, the net federal revenue would be barely sufficient to meet the first two Ds and the rest of the expenditures would be met through borrowing and external assistance.
This time the net federal revenue is budgeted as Rs2,926 billion. The debt servicing is budgeted to be Rs1363 billion, defence will be Rs920 billion. The remaining amount, Rs643 billion is what the federal government is left with to take care of the third and fourth D. The third D includes the running of the civil government, federal administration, pensions, subsidies, grants, direct allocation, etc., whereas the fourth D is PSDP, which amounts to Rs1 trillion.
As it is presented in the budget, the difference between revenue and expenditure is almost Rs1900 billion (Rs1826.8 billion to be precise). To remain within the budgeted fiscal deficit of 4.1 per cent of GDP, the deficit should not exceed Rs1479.6 billion. Thus, a provision is made for provincial surplus to the tune of Rs347.3 billion. The 4.1 per cent of GDP fiscal deficit would be met through external loans and domestic financing.
Because the current government is confident to win the next elections and knows that it would have to deal with any financial mess that it creates now, so it sticks to a prudence approach. However, my concern is that the fiscal deficit will cross the budgeted target.
The budgeted power sector subsidies (to WAPDA/PEPCO/KESC) amount to Rs117 billion. There is no provision for circular debt which stands at Rs414 billion as of today. Moreover, there is neither a provision for fertilizer subsidy nor for the refunds of exporters from FBR. In the best case scenario, these unaccounted expenditures would add up to another 2 percentage point of the GDP (around Rs600 billion) to the fiscal deficit.
On top of it, despite the prudent approach of the finance minister, the prime minister and his colleagues would announce development schemes and electoral packages which will add further burden to the economy. So, we expect the fiscal deficit to touch around 6.5 per cent of GDP by the end of 2018 if the petroleum prices remain the same. Any further slip on fiscal deficit and going back to IMF in FY 2018-19 would become unavoidable. Investment coming from CPEC may ease up the situation a bit.
Despite the abovementioned constraints, there are some positive points in the budget, too. Among those, budgetary measures on agriculture are worth mentioning here. Having ignored agriculture in the initial three years, the PML-N government has realised its importance, not only for GDP but for the next elections, too. The PML-N is hoping to spend on agriculture and get votes from rural areas of Punjab, thus compensating for the PTI’s growing influence in the urban centres.
In case of fertilizer, popular demand is that the General Sales Tax (GST) on fertilizer, especially urea, may be lowered. The GST is imposed once on the supply of gas to the fertilizer plant and also applied on the retail price of urea. The government has decided to withdraw the GST on gas supplied as raw material to the urea plants. Moreover, the price of imported urea lying with National Fertilizer Marketing Company has been fixed at 1000 rupees against the current market price of 1400 rupees per bag.
The reduction of mark-up for agricultural loans (though for owners of less than 12.5 acres and for a loan up to 50,000 rupees), and duty free import of combined harvesters are other welcoming steps.
Another commendable effort by the current government in this budget is the federal PSDP. Even though the PSDP is borrowed and dependent on external sources, it has been increased by almost 300 per cent from Rs320 billion of PPP’s last budget in 2013 to Rs1 trillion.
The releases against the PSDP funds in this government have been efficient. In FY 2015-16, almost 90 per cent of the allocation was released and the same is expected in the current year as well. The total amount of Rs1 trillion kept for PSDP is mainly (around 70 per cent) infrastructure and 30 per cent for the soft development projects.
One more worth mentioning aspect of PSDP is the amount allocated for Higher Education Commission (HEC). The allocation has been increased from Rs21 billion to Rs35.5 billion, which is a marked increase from the past allocations.
Social sector, including education, health, drinking water, sanitation, environment, sewerage, etc., now falls under the provincial mandate. Besides some direct grants, a huge amount of Rs1112 billion has been allocated for provincial PSDP.
With such high allocations, the provinces ought to take care of most of the social sector needs in their jurisdiction. If that is not happening, then one needs to carry out a realistic assessment of the 18th Amendment, especially whether the social sector should be a provincial subject, a federal subject or should be taken care of jointly by both federal and provincial governments.
While the federal government is trying to make both ends meet through juggling between the first two (debt and defence) and the last two (day-to-day administration, development) “Ds”, one must ensure that provinces contribute towards a stable and sustainable national economy. The provincial governments should release their economic surveys vis-à-vis the economic survey of Pakistan. In addition, the provinces should also show their GDP growth and major contributors of that growth.
While it was historic that the prime minister could present the fifth consecutive budget, the mere fact that others could not achieve this milestone reflects the vulnerability of democratically-elected governments. The non-democratic forces toppled the democratically-elected governments in the guise of latter’s inability to deliver on social sector development.
The current government has entered in the fifth year of its term. It should understand that GDP growth, sans job creation and livelihood security, means nothing to the ordinary citizens. The PML-N government needs to focus on the improvement of human security of the country through spending on education, health and livelihood. Such actions would not only provide relief to the general masses but also ensure that there is no undemocratic transition of power in the near future.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.