Budget aims to correct macroeconomic imbalances

By Aftab Ahmad

The Federal Budget 2008-09, presented before the National Assembly on June 11, is being lauded as a ‘pro-poor’ and ‘relief’ budget. There is no doubt that the budget provides relief to people belonging to the fixed income and lower income categories. However, the budget also simultaneously aims at addressing the growing macroeconomic imbalances, which have continued to plague the economy in recent months. This is no doubt a remarkable and much needed effort, made by the new Government at the first opportunity.

During the last one year or so, the various macroeconomic indicators had deteriorated rather seriously. The budget deficit surged to 7 per cent of the GDP or Rs.700 billion in absolute terms, against a target of Rs.399 billion. The trade deficit is expected to balloon to $20.5 billion, while the current account deficit is poised to cross the $12 billion mark, by the end of the current financial year. Inflation rages at above 10 percent, while food inflation has gone up to 15 percent. As a result of the weakness of the external sector, the exchange rate of Pak rupee deteriorated to Rs.68 to a US dollar, compared to Rs.62 to a US dollar, a few months ago. The foreign exchange reserves have dipped to less than $11 billion from above $15 billion, not much long ago. The country’s external debt has mounted to $46 billion, for the first time. In the above situation, appropriate steps were needed to save the economy from an impending disaster and it is gratifying to note that steps have been taken in the budget to address the macroeconomic imbalances.

The budget proposes to reduce fiscal deficit to 4.7 percent from the present level of 7 percent. To achieve the objective, the tax collection will be raised from Rs.1000 billion to Rs.1,250 billion, on the one hand and, on the other hand, Government expenditure is being cut in some cases and will be frozen at the present level, in other cases. The total amount of subsidy has been reduced in the budget to 2.4 per cent of the GDP from 3.9 percent of the GDP in the 2007-08 budget. All the non-development expenditure, except salaries/pensions of Government servants, is being frozen at the current year’s level, while any further purchase of cars, air-conditioners and office equipment etc. is being banned.

To bring down the trade/current account deficit, the budget proposes on the one hand to boost exports by establishing export-processing zones, industrial zones and garment cities etc. and providing adequate facilities to the manufacturing sector and, on the other hand, imports of luxury goods and non-essential items have been discouraged in the budget by substantially raising the import duties. It has been decided in the budget to ensure the supply of electricity for 24 hours to the textile industry without any load-shedding, as cotton textiles are the corner-stone of our exports. At the same time, in order to discourage the import of luxury goods and non-essential items, it has been decided in the budget to raise the import duty on 300 non-essential items to 35 percent from the present level of 15 percent. These items inter-alia include perfumes, crockery, furniture, tiles, air-conditioners, refrigerators, deep-freezers and cooking range etc.

One wonders if the aforesaid measures proposed in the budget would be enough to bridge the massive gap existing between the imports and exports, at present. The Government would be well-advised to monitor the imports and exports figures, on a monthly basis. Perhaps, it may be necessary to initiate additional measures to bring down the trade/current account deficit from its sky-high level. In this connection, promoting the exports of value added products like IT and engineering products could work wonders. An export-led growth of the engineering industry would, also, ultimately lead to less import of machinery. At the same time, by achieving autarky in agricultural production, we may save lot of our foreign exchange presently being spent on the import of all sorts of food items.

The budget, also, aims to bring down inflation, although the same is made difficult due to global inflation and the surge in the international oil prices. A two-pronged strategy has been adopted in the budget to tackle inflation. In the first instance, the income of people belonging to the fixed income and lower income categories has been enhanced to enable them to fight inflation. The salaries of civil servants and armed personnel have been increased by 20 percent, in the budget. At the same time, the pensions have also been increased by 20 percent. The minimum wage has been increased to Rs.6000 per month from the present level of 4,600 per month. In addition, Benazir income support scheme has been launched under which 5 million poor families would ultimately be paid at the rate of Rs.1000 per month to supplement their income. Besides, the poorest of the poor would continue to benefit from the Bait-ul-Mal and the utility stores, the number of which is being increased to 6000.

The second component of the strategy to fight inflation is through boosting agricultural and industrial production, for which a number of facilities have been provided in the budget to the agriculture and manufacturing sectors. The Government is of the view that the prices of agricultural and industrial products can be brought down by improving the availability of these products. To increase the productivity of the agriculture sector, the subsidy on DAP fertiliser has been increased from Rs.470 per bag, at present, to Rs.1000 per bag. Besides, the credit availability for the Agriculture sector has also been increased further by Rs.30 billion. Similarly, in order to increase the productivity of the manufacturing sector, around the clock supply of electricity to the textile industry has been assured. Besides, duties on the import of raw material have also been reduced in the budget to increase the competitiveness of local manufacturers.

If the Government succeeds in bringing down fiscal deficit and trade/current account deficit from their higher level, the same would be of immense help in controlling the inflationary pressure and, also, ensuring exchange rate stability. Sustainability of economic growth in future can be ensured only if there is macroeconomic stability in the country.