Pakistan budgets for another tough year
By Syed Fazl-e-Haider
QUETTA, Pakistan - Prime Minister Yousuf Raza Gilani's finance officials face a
grim task on Saturday when they are due to present the budget for the year to
next June. Their planned budget deficit may considerably breach limits agreed
to with the International Monetary Fund (IMF) after economic growth of only 2%
in the past 12 months, or less than half the original target.
Most sectors have performed poorly over the past year, amid domestic political
turmoil and military operations against Taliban insurgents in some areas,
according to the official Economic Survey report for the year 2008-09. Poverty
is increasing, exports are falling, and tax collection is dragging behind
target. The survey
was due to be released officially in Islamabad at 5pm local time on Thursday.
With population growth at 1.9% per annum, the 2% increase in real gross
domestic product (GDP) indicates a decline in per capita income for the past 12
months. The GDP increase is less than half the original 5.5% and well short of
the most recent target of 2.5%.
The industrial sector shrank 3.6% in the past 12 months, against a growth
target of 6%, and while services did grow 3.6%, that was barely half the 6.1%
target rate. Exports for the 12 months ending June 30 are expected to be worth
$19.5 billion against a targeted $22.9 billion. They are expected barely to
rise in the coming year, to $19.9 billion.
Only the agriculture sector showed signs of strength, with growth of 4.7%,
compared with 1.1% for the previous 12 months and beating the 3.5% target for
the year.
Critics say ill-conceived government policies have led to stagnation, while
closure of industries is drying up government revenue. Local analysts believe
that the June 13 budget is being prepared at the dictation of the IMF, which
will closely scrutinize the government's spending plans after granting the
country a US$7.6 billion emergency standby facility last November to stave off
a balance of payments crisis.
Even so, the budget shortfall "may go up to 5.5%" of gross domestic product,
Bloomberg reported, citing financial advisor Tarin speaking on Wednesday. That
would breach the 4.6% target agreed to with the IMF.
Business Recorder, citing the Economic Survey, reported that the
intensification of the "war on terror" into settled areas, coupled with
domestic political turmoil and an unstable law and order situation "tested the
resilience of economic fundamentals". The report also cited "acute energy
shortages and supply shocks ... augmented by external factors like the
worsening of international financial crisis".
At the same time, the government is finding it increasingly difficult to pay
its bills, with tax collection by the Federal Board of Revenue (FBR)
decelerating in real terms over the past 12 months. The board's tax collection
to GDP ratio may reach only about 9% of GDP against the target of 10%.
The per capita income for this still largely poverty stricken South Asian
nation of 170 million people poor is falling after a surge to $1,085 in 2007-8
from $410 in 1999. Per capita income fell to $1,071 in the 12 months to the end
of June, according to The News.
Residents are hurting after the slowest GDP growth in 10 years and 30%
depreciation of the rupee against the US dollar.
Analysts believe high interest rates and a tight monetary is holding back
growth. Under IMF demands, the government has raised interest rates, causing a
slump in the industrial sector, leading to a decline in revenue collection and
a slowdown in exports proceeds. The poverty level could increase further as the
government continues to respond to IMF strictures, they said.
One beneficiary of the battle against the Taliban in the North-West Frontier
Province (NWFP) and elsewhere in the country is the military, with the defense
budget expected to increase considerably in the coming fiscal year.
The terrorist threat was highlighted as recently as this Tuesday by the suicide
attack on the Pearl Continental Hotel in Peshawar that killed 11 people and
injured 50. The blast followed Taliban threats to carry out major attacks in
large cities to avenge an army offensive against insurgents in the NWFP's Swat
Valley.
Defense expenditure surged by 14.29% in the nine months to March from the same
period last year, in stark contrast to a 25% decline in development
expenditure, that cut helping the government to curtail its fiscal deficit to
3% of GDP in the period.
Adding to the government spending burden is the displacement of civilians
caused by the military operation still underway against Islamist extremists in
different areas of Malakand division in NWFP.
The government has declared Malakand a calamity-hit area and has said it will
write off all agricultural loans extended to farmers in the area. More than 2
million people are estimated to have fled the conflict areas and huge resources
are required to help in relief, rehabilitation and reconstruction. The UN had
appealed to the world community for $543 million in humanitarian assistance,
and is bemoaning the response so far.
"I am not satisfied with the funds we have received in response to the UN
appeal," daily Dawn quoted Fikrat Akcura, the UN Humanitarian Coordinator in
Pakistan, as saying. "From September 2008 until now we have received only $88
million, while the influx of displaced persons has increased manifold during
past few weeks."
The government will try to boost the tax-to-GDP ratio by expanding the tax
base, rather than lifting tax levels.
"The past policy of increasing the tax burden on the existing taxpayers has
proved counter-productive," Business Recorder quoted Tarin as saying. "To
maintain a sustained growth of 8% to 10%, tax revenue has to be in the range of
15% to 17% of GDP. However, the growth in this fiscal year will be around 2.5%.
Although the debt-to-GDP ratio has declined appreciably during past seven
years, the debt in actual terms has increased appreciably."
The local business community is seeking a withdrawal of a surcharge on
electricity bills and a cut in sales tax on raw material and finished products,
claiming the existing 15% sales tax is the highest in the region.
Syed Fazl-e-Haider (sfazlehaider05@yahoo.com) is a Quetta-based
development analyst in Pakistan. He is the author of six books, including
The Economic Development of Balochistan (2004).
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