Pakistan’s economic problems

And budgets that miss them

Our budget speeches have a tendency to become monotonous macroeconomic lectures, especially when the finance ministry is run by Dar sahib. Granted, it is a custom made opportunity to wax eloquent, but the rhetoric should not be too divorced from reality. No doubt the economy has grown better than recent years. The previous government boasted few ministries that did not struggle, and finance was no exception. And the floods and terrorism did not help matters, of course. That does not mean, though, that Hafeez Shaikh’s budget speeches were very different from Ishaq Dar’s.

But now that the additional space has been created, it is all the more important to make allocations in a manner that target the most needy parts of the economy. And this is where the Dar model leaves a little to be desired. Despite the fanfare, the budget is about a few very important provisions – principally the development program, government revenue, and the fiscal deficit. Now, the 24 per cent increase in the PSDP is appreciated, but only when a big chunk of the Rs525 billion goes to sectors that need it the most. And Pakistan’s most urgent need being human resource expansion, it is difficult to understand how mega projects and more motorways are preferred investment. It says much about the government’s priorities that the entire health sector budget (Rs26.8 billion) is roughly equal to the Lahore-Karachi motorway (Rs25 billion) provision. The long list of power plants, too, fails to impress. Our problem is not production capability, but rather making influential people and institutions pay, and the finance minister knows this well.

Regarding revenue collection, Dar sahib’s theory differs markedly from his policies. Export friendly policies are always welcome, but the EXIM bank and reduced markup on export finance (from 9.4 to 7.5 per cent) will have limited impact at best so long as the export basket remains small. We remain among a handful of countries, even in the region, whose imports are increasingly high-tech value added, but exports still do not go beyond agriculture, textiles, etc. But it is the other arm of revenue, tax collection, where the government needs to answer some serious questions.

It was difficult not to be impressed by the finance minister’s concern for broadening the tax net except, of course, if you heard his last budget speech. Then, as now, he proposed bold new measures, including forcing non-payers and evaders to pay. But as the year went on, the initiatives proved hollow, and the industrial lobby that makes the ruling party’s main constituency obviously had its way. And the large and complex regime of concessionary SROs, which he now promises to roll back, was re-introduced to repeatedly favour the regime’s blue eyed. It is little surprise, therefore, that the collection figure was revised down from the original Rs2381 billion to Rs2050 billion, and eventually only a little in excess of Rs1940 were collected. The minister’s tall claims are not new, but implementing some of his promises will be a welcome break from the past.

So long as the most important holes are not plugged, the marginal improvement in the fiscal deficit (from 5.8 to 4.9 per cent), will not last long. This is a tricky figure and can change sharply. The finance minister is advised to take a deeper look at the economy’s real problems and needs, and make his actions speak as impressively as his words.