It is feared that the government will opt for populist stance in budget formation which may plunge the country deeper into economic crisis
(by SHABBIR H. KAZMI)
The Federal Budget will be presented in May. Consultations by the government with coalition partners and the opposition have already begun. The possibility of a more populist budget has risen as a result of the elections falling due shortly. There are too may bad news for Pakistan's problem ridden economy. It is feared that the budget deficit will not be addressed in any meaningful way. It is also anticipated that if populous measures do come out, the State Bank of Pakistan (SBP) will not be able to contain government borrowing.
Some of the experts are of the view that the budget may not go beyond rhetoric and prove a complete disappointment for the business community. They also do not expect appropriate measures to boost revenue collection. One of the worst problems is that that the tax regime in Pakistan is not transparent. There are too many incentives and too many subsidies. It is a complicated task to have a simplified tax system. While there is need to curtail non-developmental expenditure, there is also a need to ensure targeted subsidies and to avoid programs like Benazir Income Support Program in order to contain fiscal deficit within sustainable levels. There are fears that growth is going to be much slower in 2012-13 than it was in 2011-12, meaning that the deficit probably will be higher than planned.
The worst fears emanate from rising price of crude oil in the global market. Pakistan faces double edged sword; on one hand its oil import bill is rising due to larger quantities of crude oil and POL products being imported, and on the other hand Rupee is depreciating against all the leading currencies. Adding to this is the huge import of fertiliser and failure to export sugar. The delay in allowing export of sugar has led to smuggling of nearly half a million tons sugar.
Experts fear that the federal budget for 2012-13 will be a litmus test for the government which desperately needs to exercise damage control by taking pro-reform and market-friendly measures. A cause of real concern is that the SBP will not be able to sustain damage control measures due to failure of the government to pursue priorities of boosting investment and containing inflation. Lately, the SBP has been pumping huge amounts of cash into the banking system to forestall another government-led crisis, a funding crunch caused by heavy public borrowing. The central bank appeared to have made a secondary goal, ensuring ample liquidity in the banking system to enable the banks for lending more money to the government rather than ensuring price stability.
It is on record that the government had been borrowing heavily from central bank, which was widely criticised by both the central bank as well as IMF as this borrowing was fueling inflation. As a consequence the government turned towards borrowing from commercial banks, which emptied banks and liquidity for the private sector vanished. The government has once again faced criticism but massive debt servicing has left no other option but to borrow from commercial banks.
As per the latest fiscal update, total revenues stood at Rs1.14 trillion, showing a growth of 15% YoY during 1HFY12 while expenditures went up by about 13% YoY during the same period, totalling to Rs1.67 trillion. Contraction in the budget deficit was primarily due to exclusion of the one-time circular debt-related TFCs swap (Rs391 billion of TFCs were converted into PIBs and T-Bills amid non-servicing). These TFCs were issued to banks in 2QFY12 for compensating energy sector companies against their ever-mounting payables and receivables. Had this amount been included, the budget deficit would have shot up to Rs923 billion or 4.4% of GDP in the 1HFY12.
Debt and liabilities servicing has reached over 90% of the entire tax revenue collected in the financial year 2011. According to the data issued by the SBP total debt and liabilities servicing rose to Rs1.475 trillion during financial year 2011 from Rs1.078 trillion a year ago. The debt and liabilities servicing was up by 37% in just one year.
Lately, Pakistan Institute of Development Economics (PIDE) in its latest report has observed that "with the government embroiled in political controversies and the election year approaching, economic issues are likely to remain on the backburner for at least in the near future, dimming hopes of a reversal in the economic situation." It was also hinted that the temptation of the government to adopt populist measures ahead of elections could further compound economic difficulties of the country. The report raised the caution that the economy would most likely miss the overall GDP growth target of 4.2% due to intensification of the energy crisis.
The target for fiscal deficit at 4.7% of GDP was also unlikely to be achieved with slow growth in revenue collections, continuing losses of the state-owned enterprises and increased pressure on public spending. Much of the increase in tax collections by the FBR was accounted for by sales tax on rising imports of petroleum and fertilisers and this increase was unlikely to be matched by tax collections from domestic sources in view of the sluggish economic activity in the commodity producing sectors.
While the latest observations of the PIDE about the state of the economy may be true, it completely fails to suggest the strategy to overcome the precarious situation. PPL-led coalition government already accused of uncountable allegations will be under pressure to cut public spending and rein in a ballooning deficit for spurring growth. This task comes at a time of infighting in coalition and the worst criticism by PML-N, ruling the biggest province of Pakistan. The prospect of another policy U-turn can inflict further damage because of being termed incapable of managing economy of the country efficiently.
To contain budget and current account deficits it is necessary that Pakistan finalises barter arrangement with Iran at the earliest. Under the arrangement Pakistan will supply 2 million tons wheat to Iran and in exchange buy fertiliser and crude oil. Iran has already promised to supply 80,000 barrels oil per day. However, it is necessary to point out that opposition has not joined the government in convincing the United States as yet that if Iraq can be allowed to buy food in exchange for oil why can't Iran do the same?