In the final budget of its term, PML-N projected that an increased growth rate of 6% in 2017-18, will not only allow its government to keep a wide range of expensive development promises, but also do so while keeping the fiscal deficit in check at 4.1%. Is it wishful thinking? Before one answers this question, let’s analyze what happened in 2016-17: GDP grew by 5.3% but at the same time the current account deficit (gap between exports and imports) also grew by more than negative 3% of GDP, and since the excess of net imports over net exports is always subtracted from the GDP growth figure, it essentially means that if we, for a moment, were to keep this CAD deficit aside, the Pak economy in effect grew at a rate of nearly 8.50% in 2016-17 – phenomenal by any standard! We saw that as the oil prices kept low, the resultant savings from net barrel value reduction were diverted to respective quantum increase in oil imports: 5.9 million tons imported in just 9 months (July to March 2016-17) as against 4.2 million tons in the entire 2015-16. Something, which can be interpreted both ways: Good and Bad. Good, because petroleum ultimately translates to fuel and energy and the increased tonnage import meant that economic activity in the country got a boost through energy for investment, utilization of idle capacity and new jobs leading to poverty alleviation. Bad, because it reflects rather poorly on government’s power policies and its inability to generate affordable power; already 4 years-on in its tenure whence bulk of power is still being generated on inefficient thermal plants, thereby resulting in high unit cost for the government (that requires subsidization) and expensive power for the consumers! In-turn rendering the country and its manufacturing uncompetitive for the items it exports. Further, populist gimmicks by PML-N, like pricing domestic petroleum cheaper than any country in South Asia may have gained them some votes but is tantamount to smoking away our dollar savings arising from depressed global oil prices – fuel consumption in motorcycles and automobiles grew by a whopping 25%. Not surprisingly, in 2016-17, we saw the resurgence of circular debt in the power sector, an unprecedented increase in the sales on motorcycles and automobiles (ironically both made from pre-dominantly imported kits), and a significant decline in our exports of manufactured goods.

The other main concern cropping up from 2016-17 working relates to mounting debt. Government in recent years has been on a borrowing binge, and in the process resorted to acquiring expensive foreign and domestic debt at commercial rates. While it has repeatedly claimed that it is increasing its credit only to the extent of the budget deficit requirements, the reality is quite different. For example, the increase in federal government’s debt from July-September 2016, adds up to Rs858 billion, whereas, the budget deficit in the same period was only Rs450 billion - about half. Domestic debt in one year, December 2015 to December 2016, grew to 14.54 trillion (43% of total debt) or by 10.3% further raising dependence on commercial banks and adding to “various” other financial sector risks. In its own report the finance ministry has conceded that Pakistan’s debt sustainability indicators have worsened over the last 18 months. At this rate, if not checked (or if nothing changes), External Debt will reach $110 by 2020.

Now borrowing (in itself) is essentially not a bad thing as long as it can be spent in a productive manner. If all or majority of these borrowings would be put to productive use (in self-sustaining projects), it could work wonders, but then again, this does not seem to be the case! The story does not end here, as the government of late seems to be in a severe cash crunch. It has resorted to additional ‘latest’ borrowings (over and above benchmarked in Budget 2016-17) of $4.6 billion in the last 7 months ($1.9 billion on commercial terms & used for project financing) + $1 billion from rather expensive Sukuk Bonds + $1.2 billion from foreign commercial banks + balance miscellaneous from the likes of World Bank, Asian Development Bank, Islamic Development Bank, UK Government (under DFID), etc. This means that our external Debt returnable over the next 15 months will come to around $6.5 billion. Add to this the rising current account deficit (likely to close at around $9 billion by June 2017) and the likely scenario going forward points towards yet another IMF Program fairly soon. Well, seemingly a serious concern, but then again on the flip side not all gloom and doom. To grow one needs capital and with IMF on board it could in fact present the ideal environment to ensure fiscal discipline and to finally ring some long stalled financial reforms.

Back to our original question: Will the government be able to post the desired growth while meeting the challenges on mounting debt, rising imports and declining exports, and does the 2017-18 budget (as announced) seem to be a step in the right direction? A brief answer: Yes. Why yes, because a cursory look at its focal points makes one realize that the government this time has not only correctly identified the problem areas - and its own weaknesses in addressing them - but is also willing to listen and rely on professional help. However, a lot will depend on its seriousness and flexibility (where necessary) it displays to keep to its May 26th’s announcements. Refreshingly, the budget contains a number of incentives for the productive sectors and outlines Government’s efforts to revive agriculture and industry through reduction in input costs and other fiscal incentives. Industry has been given facilities of subsidized credit for manufacturers and exporters (LTTF and ERF); duty free or reduced tariffs on import of machinery for expansion, balancing and modernization; despite pressure, a prudent new level of minimum wage level; and setting up of information technology park. Also, some past incentives that were to lapse (especially in textiles) at the end of this fiscal year have been extended. While these are positive steps aimed at supporting the farmer and boosting exports, some observations nevertheless are necessary: It is important for the government to now structure and then implement/disburse these incentives in a way that they work and have the desired effect. These sectors need long-term support with technology diffusion and access to capital. Further, since they have to compete globally the government should seek professional guidance to look at them holistically in order to devise sustainable solutions and to ensure that a level playing field is provided to them vis-à-vis their regional and international competitors.

Finally, the budget also raises some other concerns that merit attention. Pakistan ranks amongst the lowest in terms of domestic savings and unless this can be improved the natural push to meaningful investment through one’s own resources will always remain elusive. Not only do we see no new incentives to encourage domestic savings, on the contrary the tax on corporate dividends has been enhanced, which instead will be counter productive. Further, as CPEC (China Pakistan Economic Corridor) extends from mere road connectivity to real time cooperation in agriculture and manufacturing-based projects in the earmarked CPEC economic zones and industrial parks, the budget fails to undertake the required measures to ensure inclusion cum participation of Pakistani stakeholders in the expanding scope and increasing financial outlay of CPEC endeavor. Sadly, from an overall perspective the budget makes no strategic departure from the past and comes up with nothing new on resurrecting our faltering public sector enterprises, checking un-desirable elements in an economy relating to conflict-of-interest, rent-seeking, cartelization and lack of transparency in corporate economic management/governance. So naturally its ad hoc nature comes as no big surprise as virtually no program on any type of economic reform has been identified during 2017-18. Like all its previous 4 budgets, even this PML-N budget also stands on a rather weak and assumptive framework and in all likelihood will end missing a number of its key targets including the one on the projected fiscal deficit.