Federal budget 2007-2008: a review
By Prof Khurshid Ahmad
Sunday, June 17,2007
Budget making is definitely a very serious exercise and the budget document a solemn piece of legislation that reflects a nation's resolve how best to overcome economic hardships and how to effectively harness the available resources to achieve autarky in all fields of national economy.
Unfortunately, the budget presented by the government for the fiscal 2007-2008 is highly disappointing. It is obviously an election budget and not one based on genuine economic logic. The government has taken credit for what it claims to have achieved by way of seven per cent rise in the GDP and $14 billion as foreign exchange reserve. The question, however, arises as to what extent are these due to the government's economic policies and to what degree due to exogenous factors like foreign remittances of Pakistani expatriates and economic and political assistance received as a result of the government's dubious surrender to US pressure after 9/11.
A recent study on development indicators released by the World Bank on April 15, shows that from 1999 to 2005 the average GDP per capita growth in Pakistan on the basis of purchasing power parity has been 4.62 per cent. During the same period the average per capita increase in other developing countries was: Philippines 5.17 per cent, Indonesia 5.77 per cent, Turkey 5.79 per cent and India 7.32 per cent. It is important to note that the average growth of GDP per capita for all low-income countries during this period was 6.38 almost 30 per cent more than what was achieved in Pakistan. In this context too much clap drap about macro indicator is to be taken with a pinch of salt.
The government's claim about reduction in poverty to the extent of 10 points, i.e. from 34 per cent of the population to 24 per cent, is similarly hardly tenable. In fact this would mean almost 33 per cent of the people living under the poverty line to cross the poverty line upwards. This means that every year 2-3 per cent of the population has moved above poverty line. In aggregate terms this would mean that out of 52 million people living under the poverty line some 13 million have improved their status and got out of the grip of poverty. A statistical miracle indeed!
What about the ground realities? Do these confirm the government's claim? Even the survey (PSLM 2004-05) on the basis of which this claim is made contains evidence, which falsifies this official position. Accordingly to Vol. II of the survey, giving provincial and district data, it is stated in Table 5.1 (Page 406) that actually 24 .15 people interviewed had claimed that they were worst off or much worst off in 2005 as compared to 2001. The remaining 51.5 said that their position has not changed. How can the official claim of 33 per cent of people moving upward from poverty line be reconciled with this confession by the same group of people? Asian Development Bank's latest report on Poverty Reduction Programme of Pakistan (Working Paper No. 4, 2007) also records people's perception that the development programme conceived so far, including the SAP, have not brought about any real qualitative change in the country, particularly, in rural areas.
One feels seriously concerned about the mis-presentation of facts and data by the government. Surprisingly, there are serious discrepancies and contradictions in the budget speech and documents. The minister of state, as well as the prime minister and his advisors have claimed that the size of the current budget is Rs1,875 billion. Yet in the federal budget document the total outlay of the budget is given as Rs1, 599 billion: (Budget in Brief, Chapter 2, p.7). This goes to show how irresponsible the government has been even in a highly serious exercise like budget-making.
Even a cursory glance of the budget reveals at least six major failures, which may be summed up as follows:
1. The country is faced with unprecedented balance of payments and balance of trade deficits. When the government took over in 1999-2000, the trade deficit was $1.74 billion. Now it has risen to over $11 billion. In fact, it is feared that this deficit could be well over $13 billion. The balance of payment deficit in 1999-00 was $1.14 billion, which turned positive in 2002-2003 and became $3.16 billion in the year the current National Assembly was elected. Presently the B/P deficit has reached the Himalayan figure of $6.2 billion. The budget fails to come up with any policy initiative to drastically reduce these two major deficits.
2. Economic growth can be sustained only if the Commodity Sector of the economy grows and becomes the main engine of growth. The growth we are witnessing at the moment is based more on the services sector and exogenous factors like foreign remittances and the US aid for Pakistan's mercenary role in its 'war on terror'. There has been no significant and sustained quantitative or qualitative improvement in the agricultural sector of economy. Basically, the agricultural sector has remained a neglected sector where the cost of production is escalating resulting in food inflation. The industrial sector is also lagging behind, particularly the textile industry, which accounts for almost sixty per cent of our exports. It is because of this crisis in our textile sector that exports have seriously lagged behind. In fact, raw cotton is now being exported ($3 billion this year), while value-added textile exports are on the decline. Other industries including leather, surgical instruments and even the sports industry are in serious trouble. Their cost of production remains high, making our exports uncompetitive. The government has neglected these problems. Unless these problems are thoroughly reviewed, this may lead to even de-industrialisation of Pakistan. Already 116 textile mills have been closed, half a million spindles gone out of motion and several million people rendered jobless. So strong in rhetoric, the budget is silent on the problems of the country's most crucial commodity production sector.
3. Inflation is beyond anybody's control. The common man is caught in its menacing grip. He is unable to have two square meals a day. Food inflation, according to official figures, is over 10 per cent and according to unofficial assessments between 15 to 20 per cent. This is ironical in the context of claims about bumper agriculture crop. The proposed relief measures stated in the budget are non-starter. Subsidies have always increased corruption and failed to deliver. There can't be a substitute for a correct economic strategy to fight inflation. Out of a subsidy of Rs210 billion that the government claims to offer in vital sectors of public interest, over Rs90 billion are meant for WAPDA and KESC. One wonders, how this hefty subsidy could be relevant in reducing inflation and bringing any relief to the poor consumers? The country needs a policy to reduce the cost of production by reducing import duties and sales tax on items of daily use. Utility Stores do not cater for more than two per cent of the population and do not serve the poor only. They are hardly the answer. Inflation can be fought only with a combined use of monetary and fiscal policies, taking care of the demands and supply sides simultaneously. This is, however, not being done. That is why the Frankenstein of inflation has been haunting the country throughout the tenure of the present government. Inflation in the year 1999-2000 was 3.58 per cent. In 2002-2003 it was 3.1 per cent and in 2004-2005 it rose to 9.3 per cent. It has been eight per cent during the current and last fiscal year. The budget has miserably failed to seriously address the very crucial issue of inflation in all its dimensions.
4. The other major problem faced by the country relates to poverty and unemployment. Both are organically linked. So is the question of human resource development and manpower and educational planning. The budget is full of rhetoric but there is no plan to effectively face these challenges. There are no sufficient allocations for poverty reduction and massive promotion of health-care. A vital sector like education is starved of resources. The government has increased expenditure and remains addicted to ostentatious living. The development expenditure has been revised downwards to the tune of Rs36 billion. The budget fails on the count of real development, poverty eradication, human resource development and social welfare.
5. Another major problem relates to the elitist nature of the economy. Musharraf-Shaukat policies have made the rich richer and the poor poorer. The extent of inequalities in the country has increased to scandalous proportions during the last eight years. The government's economic survey admits that the top 20 per cent are getting at least 400 per cent more than what is being received by the lowest 20 per cent. According to another study, out of every 100 rupees added to the national income, only Rs3 go to the lowest 10 per cent and over Rs40 to the upper 10 per cent. The stock exchange and real estate boom has only been instrumental in producing millionaires and billionaires because of speculation, not through real value-addition in the economy. The country's elitist class of big landlords and capitalists has become the robber-barons. They are subject to no tax. It is the common man that is crushed under the weight of indirect taxes, while the class of exploiters is spared of any effective tax regime. Inequalities are multiplying and producing divisiveness and polarisation in society. The budget fails to even take note of this gruesome situation.
6. Finally, the government's claim about the fiscal discipline is fictional. The budgetary deficit is above Rs300 billion. The quantum of both the external and domestic debts has increased. Total national debt has swollen to more than Rs1500 billion during the last seven years. The debt management strategy has totally collapsed. Another aspect of the government's failure relates to squandering away of the fiscal space of around forty billion dollars provided during the last seven years in the form of remittances from Pakistani expatriates ($26 billion) and foreign assistance ($10-12 billions). These huge resources have not been harnessed in investment avenues and the bulk of them has gone in conspicuous consumption, real estate and stock exchange speculation. The country is living beyond its means. The rulers have set the worst example. Unproductive expenditure has recorded exponential increase. So has expenditure on the armed forces, whose budget has increased three-fold from around Rs90 billion to virtually over Rs300 billion in the 2007-08 budget. This has made the country's economy lop-sided and the government will have to account for this strategic failure.
Finally, huge allocations made for district and tehsil governments and local unions, are for all practical purposes a lucid political bribe to be used for election purposes. This is a total abuse of public money.
Viewed in this backdrop, the federal budget 2007-08 deserves to be thrown out by the parliamentarians in the same way as happened with the budget presented by Mr Yasin Watto in 1986-87. This year's budget deserves a similar fate. Would the National Assembly do its duty or buckle under pressure from the government in uniform?
The writer is a member of the Senate and affiliated with the Jamaat-i-Islami. Email:
khurshid@ips.net.pk
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