Ten things this budget ignored
By Sherry Rehman
Satureday,June 23,2007
EVERY year in Islamabad, even the most lacklustre parliament comes alive during the budget session. This time, no one, particularly the treasury benches, seemed to care. Budget 2007-08, like the last five presented by the regime, once again bases its unmet targets on a small elite of Pakistani society.
Even after five years of public fury at high inflation and joblessness, there is clearly no understanding of the social unrest that this kind of model has unleashed in Pakistan. Why? Because this is a supply-side model where growth is based solely on benefits trickling down, and for this model to deliver effectively in a developing country one needs 10-11 per cent growth at a bare minimum.
Yet in Pakistan no European-style social nets or American-type domestic protection for farmers cushion the shocks intrinsic to this local variant.
Growth is always a good objective but it needs to be structurally balanced in emerging markets like Pakistan. Yet, the bottom line today is that macroeconomic fundamentals remain weak because Pakistan’s growth is driven largely by household consumption at 7.8 per cent of GDP. High growth in consumer sectors disguises dangerous red lines in poverty and low manufacturing growth.
The 74 per cent who now live below two dollars a day, as per World Bank statistics, have been largely ignored except in piecemeal pockets of “relief” which represent sops for a tiny fraction, but ignore a sea of the vulnerable and the socially excluded.
To prevent Pakistan from sliding into more chaos, to lower the stresses of an unemployed, under-educated population, where regional and income inequalities spark further political unrest, the regime should have focused on the following 10 items.
One, public money should have been better utilised and targeted at higher social spending. As it stands, the Public Sector Development Programme at Rs520 billion is illusory. Not only does the real PSDP stand at Rs427 billion, when foreign loans are deducted, but 86 per cent will go to on-going projects. This leaves only 14 per cent for urgent social investments.
At the same time, the governance of PSDP is so poor that 100 projects stand cancelled by the Asian Development Bank. Education and health continue to be neglected by the regime and get an embarrassingly low allocation of Rs24 billion and five billion rupees respectively. Spending should have gone up to 4.5 per cent and four per cent GDP respectively. Although this is old news, Bangladesh performs better on education than we do.
Second, the defence budget of Rs275 billion should have undergone parliamentary audit. If just military pensions worth Rs37.7 billion are added on, leaving out other assorted military items hidden in the civilian budget, the final figure is way above Rs312 billion.
Given that defence spending makes up more than half the amount allocated for development expenditure and got a boost of 10 per cent this year, it should have been discussed in the defence committee of parliament, as in India and other democracies. Under the circumstances, where the treasury benches are beholden to a general for their seats in parliament, there is no prospect of public accountability or transparency, let alone asking what happened to the Rs60 billion from the US Pentagon.
Thirdly, the windfalls from September 11, namely $ 35 billion, should have been used more prudently, preferably to fuel infrastructure and retire public debt. Instead, the fiscal space gained from remittance and aid inflows has gone into profligate spending.
Right now the country’s foreign reserves of $13 billion don’t amount to receipts for 18 weeks of imports, which given the current balance of payments, takes us back to the same situation as 2001 where lower forex reserves covered the same few weeks of imports. Current account expenditures account for 66 per cent of the entire budget of Rs1.8 trillion, so growth is more illusory than it seems. There is no explanation for why we still borrow $38 billion from external sources when the regime claims we have broken the begging bowl, affectionately known as the “expanding kashkol” in the National Assembly. Balance of payment deficits have grown from $1.4 billion in 2000 to $6.1 billion.
Four, deficit financing should have been used less and less as an instrument of policy. It fuels inflation and crowds out private investment, while jacking up interest rates and pushing up production costs. Right now, almost half the budget deficit is funded through bank borrowing, which the State Bank has warned against. Nobody from the treasury is willing to answer why the current account deficit is expected to be around five per cent of GDP at $7.1 billion.
Five, the dangerously high trade deficit — a constant peril to the stability of the economy — should have been lowered. Despite a record trade gap of $12 billion, up from $1.7 billion in 2000, increased foreign direct investment and workers’ remittances are expected to bridge the gap. The latter may persist after 9/11, but given the collapse of law and order today, such supply-driven factors cannot plug black holes in the economy.
Instead, a proactive diversification and higher value addition of Pakistan’s export base should have been pushed to maximise receipts. It goes against the elitist grain of this government, but the import of luxury items should have been reduced by taxing high-end consumer durables. This item jacks up the import bill by $2.04 billion out of a large tab of $27 billion. This way consumption would not have outstripped domestic production by such large margins.
Six, immediate relief should have been given to the growing number of Pakistanis living below the poverty line. Yet, out of the Rs113.9 billion allotted to subsidies, only Rs2.45 billion go to stabilise the prices of essential items. Food inflation still teeters between 10 and 14 per cent and represents a real threat to the inelastic incomes of the growing poor. The subsidies on food provide relief only at two rupees per head, while an obscene Rs98 billion funds the inefficiencies of Wapda, KESC and others.
Fiscal policy should also have been used to stem tragic levels of unprecedented financial destitution due to which more than one suicide takes place per day. At present, 60 per cent of the regime’s total tax revenue for 2007-8 is based on taxes on items like petroleum, sugar, edible oils and packaged milk and meat, as well as other essential items which burden the poor.
No new taxes on capital gains related to real estate transactions or the stock market have been imposed. The Economic Survey admits that the top 20 per cent gets 400 per cent more than the bottom 20 per cent.
Seven, private investment and job creation merit serious allocations to infrastructure and peace. But political instability has driven away private capital. On May 12 alone, the CBR admitted to losing over three billion rupees plus worth of sales tax in Karachi.
Other factors that cripple investment include the paralysing power deficit. Today, Pakistan needs an additional 8,000-10,000MWs by 2010 to meet energy demands. The present government has not added a single MW beyond the PPP government-commissioned Ghazi Barotha (1,450MW) hydroelectric power project, which went online in 2004. More investments in coal, thermal, solar and wind energy would have added surpluses for the economy to resume its growth.
The MOU signed by the PPP government for the Thar coal project should have been revived long ago. This alone can yield 5,000MW of power and 200,000 jobs. Large scale investments in industry including foreign direct investment cannot move without cheap and reliable electricity. Job creation, the knowledge economy, higher manufacturing and exports, lower inflation and a stronger rupee, all need energy.
Eight, as the largest employer, agriculture merited policy attention. Banks and financial institutions should have been mandated to reserve a percentage of credit for farmers for buying inputs. Focus on farm to market roads, higher investments in water management and food processing units per district would boost employment and higher value addition to this sector. Despite critical desertification and dwindling glacier melt, no allocations were made for water conservation. The destitution in the rural sector should have been addressed by initiating a rural employment programme, as successfully adopted in India.
Nine, regional inequalities should have been brought down by devolving sales tax to the provinces. Today, the government’s failure to announce an NFC award before the budget has created dangerous strains in the federation.
Under the interim NFC award, the provincial share in net proceeds of the divisible pool is 42.5 per cent, while the centre retains a major chunk of resources worth 57.5 per cent. Instead of delaying the award since 2002, a fair distribution of national resources based on more than population criteria was needed.
At the same time, the natural gas and royalty formula of the 1973 Constitution should have been applied immediately in order to stabilise the pressures emanating from the NWFP and Balochistan.
Lastly, to show some commitment to the financial austerity so badly needed to curb deficits, non-development expenditures should have been slashed. But the regime’s priorities reflect no concern for public opinion or institutional accountability.President House expenditures have gone up by Rs25 million to over Rs316 million. The National Accountability Bureau, which was established to hound political rivals of the regime, has nothing to show for its lavish spending. Its expenditures, too, have gone up in this budget to an astronomical Rs2.4 million a day at Rs897 million.
In contrast, the ministry of law, justice and human rights is set to spend only Rs179 million. But then we all know how the Supreme Court Chief Justice’s extra car burdened the economy, don’t we?
The writer is a member of the National Assembly and central information secretary of the Pakistan People’s Party.
http://www.dawn.com/2007/06/23/ed.htm#4