An election-focused budget
Monday,JUNE 11,2007
THAT it would be an election-centric budget was never in doubt. The proposals for income and expenditure for 2007-08 announced by the minister of state for finance Omar Ayub Khan in the National Assembly on Saturday more than confirmed the expectations. Still, compared to the official buildup and Mr Khan’s hyperbole in his budget speech, relief offered to the common citizen does not appear all broad-based and lasting. Some of the proposals do try to address the concerns found among vulnerable pockets, but that is all. At Rs1.874 trillion the total outlay of the budget is awe-inspiring when compared with previous budgets. If as much as Rs1.025 trillion is being projected by way of resources to cater to the financial needs of the nation over the next 12 months, with a deficit financing of just 4 per cent of the GDP, at Rs398 billion, one must praise the effort of the official economic managers at resource mobilisation. This is amazing, because there are no more than about 1.2 million tax payers in a country of 160 million. The agriculture sector, a major contributor to the GDP, as well as real estate and capital gains continue to stay out of the tax net. With so much available for spending it was only expected that there would be massive increases in the allocations for important economic and social sectors, and enough left for providing financial relief to low-income groups. This is to be done through increase in income, salaries and subsidies offered on the poor man’s essential kitchen items to save him from the hardship of food price inflation. Sizeable allocations have been made for the provinces and districts as well; the latter ostensibly for furthering the ruling coalition’s election bid in that offering no break from the past.
During the outgoing year, food price inflation of over 10 per cent left many a kitchen cold, even in households estimated to be living a little above the poverty line. Combined with an overall Consumer Price Index of nearly 8 per cent it was but expected that the consumption of the poorest 20 per cent of Pakistanis remained below 10 per cent in the outgoing year, while the richest 20 per cent enjoyed a consumption rate of nearly 50 per cent. The gap between the poor and the rich continues to widen. There are no open or hidden measures in the new proposals that one could say with a degree of certainty would attempt to bridge this gap. The promises to create thousands of jobs and build thousands of low cost houses for the poor are just that at this stage. Last year, while announcing the budget, the government had promised to send out magistrates for checking the prices of essential kitchen items, but no magistrates were seen in the field in the course of the year.
Every time the government is faced with tackling high food price inflation, which has been there now for three years running, it has taken shelter in Utility stores. In the first place there are just not enough Utility stores (about 1,000 or so) in the country to take care of the needs of the teeming millions. Secondly, when you are practising market economy how is it possible for you to intervene efficiently with public sector instruments to control prices even if you succeed in setting up 5,000 such stores, say, within a year? Last year an announcement to the effect was made, but with a difference. The government had promised to help set up such stores under a public-private partnership. Nothing has come of it so far. Of the total subsidy outlay of Rs113.9 billion, only Rs2.45 billion are proposed to be used for keeping the prices of pulses, sugar and ghee within the reach of the buyers shopping at Utility stores. A major portion of the subsidy, Rs98 billion, is being kept to help out Wapda, the KESC, the petroleum companies, refineries and the textile sector. This bares all as to the state of governance in public sector corporations, and the government’s urge to stay on the right side of big businesses while making claims to alleviate poverty.
In this year of record wheat production, atta prices have escalated sharply just before the unveiling of the budget, forcing the government to impose a ban on flour export. Perhaps exports contributed to the shortage seen in the market to an extent, but major reasons for short supplies and high prices were hoarding, black marketing and an inefficient distribution network. The overall inflation rate, much like in the outgoing year, is not going to slow down over the next 12 months. There is nothing in the new budgetary proposals that has the ability to tackle the menace at its root. The production sectors continue to stagnate. No real investment is coming their way. Agriculture remains at the mercy of the weather, and the availability of water; a bumper crop one year is no guarantee that bulls would rule the coming years as well. The manufacturing sector is one that needs badly to be geared up and diversified. An overwhelming dependence on cotton textile will not help the country in the longer run. There will very likely be shortages all around. One says this because cotton production has seen a decrease in actual terms in the outgoing year. The trend is not likely to reverse anytime soon, given the shrinking crop on account of water shortage and ineffective pest control.
There is an expected inflow of nearly $5 billion in remittances, coupled with substantial income in foreign exchange from privatisation. These inflows will partly take care of the current account deficit, which is widening mostly due to stagnant exports and a rise in imports. The additional income is not due to a significantly greater domestic economic activity. As such rupees generated against incoming dollars add to the M2 aggregate, which creates the unwanted condition of more rupees chasing fewer goods, causing in turn the prices to go up. Attempts at cooling this hyper circulation of currency by the State Bank of Pakistan only end up raising the interest rate, thus escalating the cost of production which already has become prohibitive because of shortages of infrastructure, especially of power. This is causing even textile exports to price themselves out of international markets. That is why perhaps textile tycoons keep demanding subsidies. That is also perhaps why most of the earned foreign exchange by way of remittances and concessional capital coming into the country is going into unproductive sectors like real estate and the stock market.
The proposed share of current expenditure at Rs1.599 trillion in the total budgetary outlay is a worrying 66 per cent. One only hopes that it will not shoot up to over 72 per cent as it did in the outgoing year. Such overshooting of current expenditure eats into the development budget which is estimated at Rs543 billion for the current year. The reference to the defence budget has once again remained a one-liner. Isn’t it time now to discontinue this economically senseless and undemocratic practice? Let us tell the people of Pakistan the real cost of maintaining an effective deterrent and from where the resources are coming to accomplish this. The biggest flaw of the budget seems to be its failure to take serious note of the looming power crisis and depleting water resources. The allocations for these heads are not commensurate with the challenges we will be facing on these fronts within the next couple of years. Housing, too, deserved more than it got.
http://www.dawn.com/2007/06/11/ed.htm