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Tuesday, May 29, 2012

Budget 2012-13

Budget 2012-13 by Dr Ashfaque H Khan The present government will be presenting its fifth and the last budget on June 1, 2012. Given the persistence of political tension throughout the tenure, deterioration of security environment, unfolding of multiple epoch making events and intensification of the war on terror, presenting the fifth budget is in itself nothing short of a big achievement for the government. Budget 2012-13 is being prepared in an inhospitable economic environment, both domestically and externally. The domestic economic environment is largely a creation of the government itself. In fact, there is general consensus within and outside the country that the economy of Pakistan has never been in a state such as this until now. Pakistan has faced serious economic difficulties in the past, but has managed to sail through because of a strong and committed leadership and competent economic team. There is widespread scepticism as to the strength and effectiveness of both the leadership and the economic team which has rendered the people of Pakistan nervous about their own futures. It is well known that the budget is not only an account of resources and expenditure of the government but that it also reflects the policy of the government to address the challenges facing the economy. Declining investment and slowing economic growth, shrinking capacity of the economy to create jobs, rising poverty, persisting double digit inflation, mounting debt burden, depreciating exchange rate, emerging debt payment crisis, higher budget deficit, crippling effects of power sector mismanagement, and waning confidence of the private sector on the country’s economic management are some of the critical challenges currently confronting Pakistan. Budget 2012-13 must address these challenges. Expecting a serious, meaningful and reform-oriented budget in the tail end of the government’s tenure is too much. Fiscal indiscipline continues to this day, and as such the country has paid and is still paying a heavy price. Investment rate (investment-to-GDP ratio) has declined to 12.5 percent in 2011-12, which is the lowest in sixty years as against 22.5 percent in 2006-07. A 10 percentage point reduction in investment in such a short period has caused irreparable damage to the economy. Foreign private investment on the other hand has simply collapsed from as high as $8.4 billion in 2006-07 to $ 0.5 billion in the current fiscal year. More worrisome is the fact that domestic saving has declined to 5.8 percent of the GDP in 2011-12, which is perhaps the lowest in the country’s history (15.6 percent in 2006-07). Can a developing country like Pakistan achieve a higher economic growth with such dismally low saving and investment rates? It is not unsurprising to see Pakistan’s economic growth slowing to an average of three percent per annum over the last five years. All major components of economic growth have also exhibited a dismal performance. For example, despite criminal increase in support prices of various agricultural commodities, agriculture growth averaged 2.2 percent per annum, almost equal to the country’s population growth. Large scale manufacturing grew by 0.7 percent, on average, and services sector registered a growth of 3.8 percent per annum during the same period. Such low economic growth is bound to create less jobs thereby increasing unemployment and poverty. Persistence of large fiscal deficit is one of the principal reasons for the above mentioned ailments. Fiscal deficit has thus far averaged 6.5 percent of the GDP. However, the current fiscal year may see budget deficit touching 8 percent of the GDP (including the so-called one-off elements of 1.9 percent of the GDP). Such a development on the fiscal front has damaged monetary policy credibility and as such has emerged as one of the principal reasons for the persistence of double digit inflation. Large budget deficit will also add to public debt, which may reach Rs13 trillion in June 2012. It may be noted that the total stock of public debt stood at Rs6.0 trillion in June 2008, which has, since then, more than doubled in just five years. Higher public debt is bound to increase interest payment, which is likely to cross Rs1.0 trillion, thereby leaving little resources to be spent on education, health and physical infrastructure. Pakistan is sure to face serious payment difficulties on its external debt obligation in the next two years. Unless we receive huge capital inflows during this period, Pakistan will not be able to service its external debt payment. Making a budget for the next year under such financial constraints will be a gigantic task for the government. The crippling effects of power sector mismanagement and the waning confidence of the private sector on the country’s economic management have contributed immensely to declining investment and growth. Can budget 2012-13 address such issues? Budget 2012-13 will be a non-serious and politically motivated budget, directed only at ‘winning’ the election. None of the issues discussed above will be addressed in this budget. Had the government been serious in improving the health of the economy, it could have taken difficult decisions in the past four budgets. At the moment, I am more worried about the fallout of such a non-serious budget. If things go as indicated by the stance of the government, I am certain that the budget 2012-13 will not touch upon agricultural income coming under the direct tax net, implementing of the RGST, reform in petroleum sector taxation, provincial governments improving their fiscal efforts, resolution of rotten PSEs and circular debt and strengthening of tax administration. It is safe to predict that in sidestepping these thorny issues, the forthcoming budget is likely to be as out of tune with economic realities as earlier budgets. The cost as always will be borne by those not at the helm of the country but by the already economically crippled common man whose hopes for a better future lie all but shattered.

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