Not that budgets in Pakistan have ever been dependable exercises, as they continue to be tweaked or simply be ignored as the fiscal year goes along, and this one also—yet again—comes across as being just another dodgy accounting exercise with no real vision on what the government is trying to achieve or more importantly, given the impasse the Pak economy faces today, what it should actually be focusing upon. Also, one wonders about the very rationale in preparing such a budget: Are the layouts simply to please the IMF at any cost or as subsequently being advised just a day after its announcement that the country will finally be seeking an external debt restructuring sans the IMF? Surely, the team preparing it must have been as confused as they have left the public with their workings. With a tanking business environment where businesses are either shrinking or closing down by the day one fails to see where even the marginal growth will come from or how on earth the government plans to shore up an additional 30 percent in the accounted-for revenues or for that matter where will the corresponding foreign exchange come from to meet or cap the planned oil subsidies & enhanced defence expenditures since both tend to be foreign exchange related.
Surely, things would look even very different & grim if the Rupee was to slide further, which seems rather inevitable due to an exacerbated external account risk owing to a virtual absence of FDI, struggling exports, diminishing remittances, and the donor perception that is bound to take a dent from a restructuring announcement. One could argue that perhaps the aim was to merely present a budget that in effect only caters to some populist measures perceivably aimed at electioneering benefits for the government while the rest of the difficult part can just be dealt with if it gets re-elected or otherwise be simply left for the incoming rulers to contend with. If so, the problems with this argument are two folds: First, the fall-outs of this budget are expected to be much quicker than what the economic managers are perhaps anticipating and they are likely to confront repercussions much earlier than the upcoming elections’ period and the Second, that from a nationalistic perspective, it will put behind the now necessary key measures by at least another year, something that the country can ill afford at this time.
So, a fair question that can be asked is that given the almost non-existent fiscal space at their disposal what really could the economic managers have done differently? The answer to this lies not so much in the size of the spend or in dole-outs or in subsidies and amnesties, but primarily in how the resources are arranged cum allocated to send a clear signal to all stakeholders on what essentially will be Pakistan’s economic priorities of tomorrow. For example, A strong message is that only documented sector will be allowed to invest and thrive and not the other way around; of late the undocumented sector in the Pakistani economy has been thriving whereby over the last 24 months it has almost doubled. Instead, what this budget advises us is that if you are outside the tax net, you have done well and continue to do so while the legitimate taxpayers will be flogged and have to cough up almost one-third of what they paid last year. Ironically, the tax evaders or non-filers have a special category assigned to them by the FBR, something so bizarre that it has no parallel elsewhere.
Also, all of a sudden, the tax-paid white money has no value, because you can create your own by bringing back dubious foreign exchange transactions at $100k with no questions asked and with no tax implications—And who cares if FATF takes cognizance of this and places us again in the grey list?
Pakistan has been de-industrializing for almost a decade now and the need of the hour is to avoid crowding out the private sector where incremental bank credit or finance dropped by 98 percent this year. Instead what we see is an even more enlarged state footprint which in a deficit equation wants to increase the pay of its employees by 35 percent, increase pensions (non-funded by the way) by 17 percent, and continue to fund loss-making SOEs as we find no significant allocation in the budget from privatization proceeds or privatization initiatives (meaning, both sale or leasing out), and despite its unsustainable size abstains from restructuring its domestic debt from the fear of a collapse in the rather farcical financial sector by now where the sovereign lending by financial institutions accounts for nearly 85 percent of the total debt portfolio. Absent are any reforms that talk about any sort of difficult decisions like the ones that: restrict the government on having to earn first to fund its programs; aim to add extra revenues by bringing new people and businesses into the tax net; looks to stimulate the economy to generate more government revenues rather than coercion and extortion; and last but not least, one that aims to boost exports, a drive that has been the story of nearly all countries that have come out of a debt trap in the last half century!
Not far from home, the story of Sri Lanka is coming out as a fairy tale. Their current government, like the one that we now have, also initially came on the premise of fixing the country’s economic woes, but unlike ours, Sri Lankan economic managers have performed well, so much so that they have had the audacity to indefinitely postpone elections till such time that they feel the economy has become self-sustainable. The course to resurrection they chose was very straightforward and completely business-like.
The comparison with us goes something like this: a) SL: Quick to enter the IMF program by undertaking very transparent negotiations vs PK: Blow hot blow cold with the IMF and agonizingly arrogant to the lender from whom we seek to borrow, b) SL: Quickly drawing up an in-elastic import list of essentials and negotiating new limited supply-side agreements with China & India by ensuring that in lieu of the Sri Lankan market, these countries remove their internal respective tariffs to ensure cheaper imports for Sri Lanka and a supply/demand fix that by its sheer nature drives the prices down. This has brought the inflation down in Sri Lanka from 36 percent to 20 percent today vs PK: No such out-of-the-box initiative, c) SL: Quickly reduce the lending rate by 600 basis points to make it regionally competitive. Today it is at 13 percent from a high of 19 percent vs PK: We continue to have the highest lending rate in the region with effectively the banks charging almost 23 to 25 percent. Surely, no business can survive, let alone grow at these levels of borrowing, d) SL: Rationing of domestic petrol and correlating its selling price to sourcing benchmarks vs PK: Populist politics to give unrealistic reliefs, as petrol prices in Pakistan remain the cheapest in South Asia, e) Reducing value added tax (sales tax) by another 2 percent to bring it down to 8 percent vs PK: From being already the highest sales tax rate in South Asia, we are increasing it by another 1 percent, f) SL: Resorted to zero-rating on all exports vs PK: The exporters suffer from a complex, unfair and a burden some sales tax regime.
Today, Sri Lankan Rupee has regained almost 10 percent, reserves have shot up to $5 billion, exports and remittances are growing at 10 percent and manufacturing growth has returned to double digits as closed factories regularly begin to restart their engines. Unless we also strive to stand on our own two feet and look for homegrown solutions and encouragement, the malaise will only get deeper and it is mainly in this context that this budget comes across as being very unimaginative and rather disappointing!