Economic survey and constraints of budget makers

By M. S. Qazi

Economic Survey (ES) released by the Federal Government on 10 June 08, one day prior to presenting the federal budget to the National Assembly depicted an all- round poor performance by economy during outgoing fiscal year for multiple reasons of political uncertainty, rising prices of food, petrol and raw materials in international market, high domestic demand of consumable items, expansionary fiscal policy and lack of visionary management of economy during past few years. This has certainly increased stakes for the newly elected government. It has a difficult job of not only containing the slide down in economy but it has also to regain lost growth momentum and macro-economic stability within shortest possible time. The budget makers have a difficult task in this backdrop.

According to ES, economic growth during outgoing fiscal year is estimated to be 5.8 per cent against a target of 7.2 per cent and last fiscal year’s growth of 6.2 per cent. The growth is lower than average growth rate of 7.0 per cent of last five years of Pakistan and regional growth of 8.2 per cent during 2007. Despite low growth and downward slide of macro-economic indicators, economy has the strength to bounce back in case measures were taken to correct fiscal imbalances, contain fiscal and monetary expansion and improve weaker social indicators.

Budget for forthcoming fiscal year is singularly important for these very reasons and is to be made and analysed in this context. Agriculture sector is the backbone of economy. It practically remained paralysed during last fiscal year. Its growth during first 10 months (July 07 to April 08) was recorded 1.5 per cent against a target of 4.8 per cent. It has created crisis of food security in the country and lowered economic growth. Low growth in the sector was registered primarily because of decline by about 3 per cent in major crops that is wheat and cotton in particular and forestry by about 8.5 per cent.

Higher growth of livestock, minor crops and fisheries averted collapse of agriculture sector. A number of factors such as increase in cost of inputs (electricity, fertilisers, diesel), low credit, poor quality of seeds, and shortage of irrigation water and lower than expected support price of agro-commodities by the farmers have contributed significantly towards decline in out put of the sector.

Performance of agriculture sector keeps fluctuating on yearly basis. ES states that during past six years, its growth fluctuated from 1.5 per cent to 6.5 per cent. This hardly augers well for the economy because in addition to fluctuating growth there is not much of value addition and provision of facilities for storage and marketing with the result that small and medium farmers are to bear tremendous loss on account of these factors. It is therefore vital that the government should take measures to reduce cost of inputs, improve supply of credit and help creating infrastructure for value addition in the sector.

LSM (Large Scale Manufacturing) did not grow according to target of 12.5 per cent. Instead it grew by 4.8 per cent because of multiple factors that included high cost of inputs, shortage of electricity, increase in prices of oil and raw material in international market, expensive credit because of tight monetary policy pursued by the SBP and liberal import policy pursued by the government. The government needs to address the problems faced by the industry to make it competitive and productive. Unless issues related to agricultural and industrial sectors were addressed squarely in the forthcoming budget, it might end up as a case of missed opportunity to create more employment and alleviate poverty particularly in the rural areas where its incidence is higher than in urban areas.

5.8 per cent growth likely to be achieved during outgoing fiscal year according to ES is attributable to higher growth in the construction and services sectors. The two sectors have maintained solid growth as they did during last FY. Their respective growth during outgoing FY was 15.2 per cent and 8.2 per cent. Apart from decline in important sectors of economy fiscal and monetary policies did not go well with the result that economy depressed and some of the macro-economic indicators nose dived. They have created difficult economic scenario for the budget makers.

Important macroeconomic indicators inflation, current account and fiscal deficits, public debt, revenue collection, forex reserves and FDI have shown downward trend that is likely to impact economy during forthcoming fiscal year. Managers of national economy will have to burn mid-night oil to ensure that macroeconomic indicators change for the better. Much will depend upon fiscal and monetary measures that the government and the SBP would implement during FY08-09.

The most serious problem that threatens economy and society alike is inflation that has been persisting during past four years despite tight monetary policy pursued by the SBP. The contributory factors are: expansionary fiscal policy of the government and indiscrete borrowing from the SBP despite its repeated assertion that the government should borrow from commercial banks or financial market, weak supply and high demand triggered by consumption based economic growth, increase in prices of oil, edible oil and other food group items in international market and weak political will of the government to take action against market players who have manipulated market to their benefit by profiteering, smuggling and hoarding. Consequently, according to ES, CPI shot up to 10.3 per cent during first ten months of current fiscal year and food inflation was recorded at 15.0 per cent. These estimates are conservative and some of the analysts are of the opinion that CPI and food inflation are much higher than the figures given in ES.

Current account deficit has spinned-off from government hands and touched $11 billion mark because of huge trade deficit of $17 billion during first ten months of current fiscal year due to increase in prices of oil, food group items and raw materials in international market and liberal import of consumable items. Imports have surged by 28.3 per cent to $ 32.1 billion during the same period whereas exports increased by 10.2 per cent only. Exports have become less competitive due to high cost of inputs, energy crisis and political uncertainty that has prevailed in the country for more than a year. Fiscal deficit according to ES is estimated to be Rs737.8 billion or 7 per cent of GDP against a target of 4.2 per cent. The contributory factors are: high cost of debt servicing, large amount of subsidies and increase in public expenditure.

Current account deficit problem can be best addressed by boosting exports that would be possible only if cost of inputs is decreased and there is value addition and political stability in the country. Current situation on both the accounts is difficult to address. Increase in prices in international market is not in control of the government but it can take necessary measures to facilitate exports for which it has fixed a target of $22.9 billion for the forthcoming fiscal year with an increase of 16 per cent over outgoing fiscal year. In order to address the issue of fiscal deficit, the government should take a firm decision to do less borrowing from the central bank. It should adopt strict fiscal discipline and cut drastically non-development expenditure. It is a positive development that the government has made certain tough proposals in the budget to reduce fiscal deficit.

Public debt has increased to all time high in history of the country. Domestic debt has increased to more than Rs3 trillion and foreign debt have increased to around $46 billion. Debt servicing alone will consume around Rs479 billion during FY2008-09. It is a huge amount keeping in view fiscal state of economy and further borrowing by government that is estimated to be Rs449 billion including foreign borrowing of Rs300 billion will add to public debt burden. It is feared that the country might not end up in some sort of debt trap. It is to be appreciated that public debt has accumulated despite fiscal responsibility law that constraints the government from indiscrete domestic and foreign borrowing that has been witnessed during outgoing fiscal year.

The finance minister has presented federal budget to the National Assembly on 11 June 08. The budget volume is Rs2 trillion in the face of poor tax-to-GDP of 10 per cent. On the revenue side, the government estimates to collect Rs1251.5 billion through tax revenue, Rs427.8 billion from non-tax resources. Fiscal deficit is estimated at Rs449.2 billion. On expenditure side, major expenditures involve current expenditure of Rs1493.2 and development expenditure of Rs549.7 billion. The government has proposed to impose taxes worth Rs77 billion by increasing GST to 16 per cent, and imposing 10 per cent tax on telephone and electricity bills in case they exceed from a prescribed limit. These measures have not been welcomed by the general public and business community but the finance minister maintained that in order to increase tax revenue it was essential to levy tax and excise duty. The good point tax policy of the government that imports duty on 300 consumable items has been increased to reduce imports and tax those segments of society who have the capacity to pay.

The government has given relief to its employees and pensioners and increased their salary and pension by 20.0 per cent, minimum pension has been raised from Rs300 to Rs2000 tax slab for employees has been increased to Rs180,000 It has given certain incentives to agriculture sector by removing GST on pesticides and giving subsidy of Rs1000 per bag on fertilisers. The measures proposed by the government are favourable to agriculture sector than industrial sector. The business community has not welcomed the measure of imposing 10 per cent levy on electricity and telephone bills.