For all its improved revenue and development outlays, the new budget is devoid of practical, structural and fundamental initiatives required to snap out of the low growth cycle. The economic engine has not recovered from the ’08 IMF program that mandated monetary tightening, drastic subsidy reductions and a free float of the rupee. Resultantly, three years of supposed reforms have totally stunted growth. Large Scale Manufacturing (LSM) and agriculture have dropped to 1.7 per cent and 1.2 per cent growth respectively.
When the present setup took office and inherited a better, though declining, growth rate, it shelved the previous administration’s policies as too reliant on service-sector growth, and therefore artificial in their misplaced opinion. While there might be valid arguments about the impact of the intended trickle down, dismissing the sector’s centrality to our economic mix seemed inadvisable – a concern following years were to prove true.
Average five-year growth in manufacturing and services in the previous government were 12 per cent and six per cent respectively. This year’s growth, modest as it is, has been achieved primarily because of the service-sector, which dropped to 4.1 per cent in the outgoing year.
True, inflation has been tamed a touch and some fiscal indicators show slight improvement. But much of it owes to external flows because the government failed to generate indigenous resources. By not taking bold steps to initiate profound fundamental changes in the budgeting process, the government has let a very important opportunity go by. With elections expected anytime after the next budget, they should have gone for major surgery this time around to put the economy on a more solid footing.
With growth low, inflation high and fiscal deficit in crisis, the budget features no notable avenues for generating resources, meaning the government is content with resorting to foreign and local donors to bridge spending gaps which will start popping before the end of the first quarter.
On the external front, the relationship with the IMF is still not clear. Any differences that continue to persist after the budget will not only restrict Fund aid, but also discourage other multi-national and bi-lateral donors. That, of course, means that borrowing lines with the central bank will remain open despite promises to the contrary and the press will keep printing money.
Therefore, private sector crowding out will almost definitely persist. Already without power, gas, energy and credit, it could grow a meager 1.7 per cent. In growing economies, it is supposed to furnish 75-80 per cent of overall growth. Till the government addresses structural rigidities that push it to the periphery, economic growth cannot be reviatlised. The public sector development budget, too, has been unable to support the growth engine. The government has been unable to generate necessary resources in the last few years because of which the PSDP has lost 40-50 per cent in real terms. Resulting low growth was to be expected.
The biggest hurdle in revenue generation is an ineffective tax collection machinery, especially when it is made to follow a self-defeating agenda. Again, the new budget provides no justification for optimistic expectations. No new sector has been brought under the tax net. There are no new direct taxes on assets, goods, capital gains, inheritance and agriculture. Government policy is clearly to rely on sales tax and Petroleum Development Levy (PDL), which don’t differentiate between rich and poor, exacerbating social discontent.
Generally, sales tax is a small portion of a progressive tax regime. In Pakistan, it comprises over forty per cent of the overall net. This year the government needed to tone down taxing consumption and adopt a more targeted posture. The present mix offers little hope of increasing revenue and growth, or reducing inflation, deficits and pressure on the rupee.
The Balance of Payments (BoP) front, too, is registering troubling trends. Our export strength was a bubble that rode the international commodity, especially cotton, price boom. With cotton now crashing, the current account will deteriorate. The capital account of BoP is precarious with external loans, privatisation proceeds and foreign direct investment all drying up.
Now, with loans undecided and the government’s ability to generate resources chronically strained, expect yet more disturbing deficits. I foresee more pressure on the rupee leading to rapid devaluation.
In conclusion, I’m hard pressed to find structural improvements complementing the government’s optimism. Unlike last time, this year the finance minister had the whole fiscal year to observe negative trends and offer fundamental remedies. But I see little improvement in the offing. We are likely to remain trapped in low growth, high inflation, high unemployment and further pressure on the rupee.
The writer is a former commerce minister.
