Darnomics

At its best

It is Darnomics – old wine in an old bottle. The finance minister should be given full marks for eloquence. His budget speech in the parliament was perhaps the one of the longest made by any finance minister.

But so far as the substance is concerned it was no different from his speech last year and those made by his predecessors. Pakistan’s perennial problem of resource constraints and being unable to fix it by changing the mindset of our economic managers is reflected in the budget for the next financial year.

The babus of the finance ministry who are masters at the art of juggling and fudging figures for years have again pulled it off .The only difference this year is the sanctimonious and self righteous rhetoric of our finance minister trying to sound different from his predecessors.

The budget quintessentially reflects the economic philosophy of the Sharifs. It is based on building grandiose and fancy projects like motorways, bullet trains and metro buses that will somehow bring better economic opportunities for everyone.

Makes sense for a country flush with cash. However in an impoverished economy like Pakistan such schemes come at a cost. For example, even though health is pretty much a provincial matter, the entire sector outlay in the budget is Rs26.8 billion while the proposed Karachi-Lahore motorway will cost the exchequer Rs25 billion, roughly the same amount.

How the economy works in terms of expenditure can be judged from the fact that in the budget 28 per cent of the national income goes to defence affairs and services. This does not include pensions that are another four per cent.

The second biggest outlay is a whopping 27 per cent for debt servicing. However development expenditure has been restricted to only 14 per cent.

Ironically, on the income side only 19 per cent of the national income comes from direct income tax. Pakistan’s tax to GDP ratio is perhaps one of the most dismal in the world and successive governments have not lifted a number to fix it.

The present government is no exception. The prime minister, himself belonging to the industrial elite, does not believe in meaningful taxation for big business.

He has the naive concept that everyone should pay taxes at the flat rate of ten per cent. Nor do the feudal dominating the assemblies believe in paying taxes.

Our outlays in the social sector remain dismal. And no attempt has been made to correct this anomaly by a government that like its predecessors claims to be poor friendly.

In this context it is not surprising that figures simply do not add up. We are living on other people’s money (OPM). Our foreign debt stands at whopping 41 per cent of our debt. This does not include equally substantial domestic borrowings.

Our outlays in the social sector remain dismal. And no attempt has been made to correct this anomaly by a government that like its predecessors claims to be poor friendly.

Expenditure on the health sector is roughly a dismal 0.4 of the GDP whereas according to the UNDP it should be at least two per cent for any self-respecting developing country. Similarly only two per cent of the GDP is being spent on education. Again far below the benchmark set by the UN.

The Institute of Policy Reforms set up by former commerce minister Hamayun Akhtar Khan and headed by eminent economist Dr Hafeez Pasha is understandably not very bullish about the budget. It glibly claims that despite the rhetoric, “the budget shows little consideration for the ultimate purpose of public finances to improve the living standard and quality of life of the people of Pakistan”.

Even a more serious denouement of the government by IPR is that the numbers do not square up with the story in the finance minister’s speech.

There is no denying the fact that the government missed most of the targets set in last year’s budget. Decline in agriculture growth rate and a huge shortfall in growth target for tax collection is cause for serious concern. Most likely the government will miss the targets set for 2014-15 as well.

There is pronounced tendency blame the travails of the present government on its predecessor. After being in power for a little over a year and presenting its second budget, it however has to defend itself on the basis of its own performance or lack of it.

Appreciation in the value of the rupee however is not an unmixed blessing. It has negatively impacted upon our textile exports and nullified to some extent the advantage accrued by Pakistan being given the GSP plus status.

Mr Dar should be given brownie points for an impressive estimated growth rate of 4.1 per cent — the highest in six years and a decline in fiscal deficit. Keeping inflation in single digits albeit veering close to double digits is also being claimed as a feather in his cap.

Appreciation in the value of the rupee however is not an unmixed blessing. It has negatively impacted upon our textile exports and nullified to some extent the advantage accrued by Pakistan being given the GSP plus status.

Had the rupee appreciated as a result of real growth, it would have been a different matter. However, by virtue of doles from friendly countries, floating eurobonds at a monumental rate, and by selling 3G and 4G licenses has beefed up our reserves. The ostensible justification being offered for these measures is that it is to save Pakistan from defaulting.

But it does not reflect restarting the engine of growth. It is almost Orwellian logic that those who during the election campaign promised to break the begging bowl now brazenly claim that further debt is a reflection of confidence in our economic policies.

Being an investment friendly budget it gives special incentives to the textile industry that accounts for 50 per cent of our exports. Perhaps as a sop for making our exports less competitive owing to appreciation of the rupee export refinance facility (ERF) mark up has been reduced from 9.4 to 7.5 per cent.

Similarly, rate of capital gains tax on stocks has been drastically reduced to give a further impetus to the stock market.

Jump-starting the economy is not all about how good or bad is the budget. Ishaq Dar owing to his proximity with his boss is virtually perceived as the unofficial deputy prime minster. Nonetheless there are external factors much beyond his control.

Haphazard policy bordering on procrastination towards combating terrorism is affecting the investment climate, domestic and foreign. Belatedly the government is coming around owning to the military’s counter terrorism initiatives.

However, Afghan backed terrorist activities in Pakistan have further complicated the matrix. Unless concerted efforts are made to combat the existential threat of terrorism, it will be difficult to achieve the elusive goal of an economic turnaround.

Perennial law and order problem in Karachi, Pakistan’s business hub, infested with target killings and Taliban related terrorist activities are another bane. Forcible shutdown and destruction of public transport and property by MQM sympathisers in the megapolis as a reaction to the arrest of their leader in London does not help Mr Dar’s cause.