Understanding Post-Budget Mood Swings – Part II (Section I)

Spearhead Analysis – 26.07.2013

By Enum Naseer
Research Analyst, Spearhead Research

Pakistan budget 2013-14Scrutinizing the budget for its effectiveness is perhaps a job better suited to those who can understand the measures for all that they promise. The budgetary measures on their own stand as nothing more than objective facts with their contexts being far more important; analyses and endorsements help put numbers and preferences in perspective. The contribution of economists and international donor agencies is significant in this regard by taking on a holistic view for policy appraisal. The intelligentsia is then able to feed off society’s shared attitude, fine tune it, and propagate it through the media.

Section-I

A word from the experts: the anatomy of the budget document

Strengths

Eminent analyst, Malik Muhammad Ashraf holds the view that the measures proposed in the budget ‘aim exactly at what is dictated by the economic ground realities’.  According to him, “the budget proposals for the year 2013-14 present the best possible solutions to our economic woes under the prevailing circumstances.”

This side of the debate asserts that unpopular decisions will serve as a remedy for the ailing economy: a reduction in the fiscal deficit through internal resource generation by broadening the tax base and squeezing the non-developmental expenditure. The budget also provides the opportunity for export-led growth as the government has extended the tax holiday period from 5 to 10 years in the exports processing zones. The budget also reflects the government’s focus on projects in energy and water sector and hence, solving Pakistan’s energy problem. The measures have achieved one thing for sure: they have improved Pakistan’s eligibility for an IMF program that is only awaiting a formal approval from the board.

Weaknesses

It has been argued that the budget, despite being a satisfactory plan in some respects has an inherent flaw that does little to correct the structural weaknesses of the economy and especially, the tax system. The tax base although broadened, according to prominent economist, Sakib Sherani, has not been done in manner to ensure credibility.  He adds that the revenue generation measures are a flashback from the 1990s “which mostly met with little success” and that they do not introduce equity and fairness into the system.

Mr. Sherani terms the tax structure to be “dysfunctional and broken” and its continuation being the real “existential threat” to Pakistan. This side of the discussion stresses that the tax system unfairly places the burden on the formal sector which leads to the expansion of the underground economy and defeats the entire purpose of bringing reforms to fix economic woes. The country thus, has a hard time while looking to attract long-term investment and create jobs.

Renowned economist, Dr. Kamal Monoo also terms the budgetary proposals as unfair. He argues that although it has corrected things ‘somewhat’, it still puts two classes at a disadvantage: the lower socioeconomic class by “way of stoking inflation” and the salaried class by “higher incidence of tax effects”.  In his opinion, the only beneficiaries in the entire budget exercise are stock market giants, “inefficient producers in the sugar industry” and the “corrupt element in the sales tax refund schemes”. He has also expressed the concern that the effects of the proposed measures will not persist.

Suggested Fixes

The biggest challenge is that of setting the fiscal house in order and to achieve that experts suggest motivating and incentivizing the staff and working on “internal cohesion” according to Sakib Sherani. There is also a need to improve coordination between the FBR and NADRA to ensure sharing of data between the two especially in the wake of the desire to broaden the tax-base.

Improving taxpayer confidence is also a critical area that needs attention; Mr. Sherani suggests reaching out to taxpayers through “use of third-party developed automation solutions” along with identification of potential taxpayers using these “third party databases”. He also talks about issuing a charter of taxpayer rights and educating the people about their rights and privileges. Additionally, he proposes provision of a constitutional tenure for FBR employees to put a stop to political interference and also stresses on the need for allowing the parliament alone to have the authority to issue SROs.

Dr. Kamal Monoo adds to the debate by arguing that mismanagement is at the heart of most challenges that Pakistan faces. He holds the view that the budget speech was devoid of any mention of an extremely important issue:  the faulty structure of debt. Dr. Monoo further builds on this by pointing out that a falling rupee wreaks havoc on the economy by driving up debt (largely external) and when it will be devalued as per the IMF requirement, it will only mean chaos. There could be a potential crisis in the banking sector which has come to the rescue time and again and has the hopes of a bright future tied to the government’s prudence. In addition to this, he presses on the need to revive the public sector organizations in the short-run and roots for ‘optimization of their potential’ through corporate-style management that is backed by the government. Also, Dr. Monoo rules out the possibility of better management through appointment of merely new heads of these organizations (as was advertised in newspapers) as this amounts to repeating mistakes of yester years and suggests instead giving greater authority to “an independent governing corporate Board” which will appoint the chief executive officer that it deems fit for the job.

Between anxiety and empathy   

Mr. Nawaz Sharif’s inaugural address in the National Assembly was a good start, one that infused a great degree of optimism about the future amidst nervousness given Pakistan’s dismal macroeconomic indicators.

 As the goal of buoyancy was traded for growth, an understanding of the challenge of preparing the budget structure gave rise to feelings of empathy for the team at the helm of affairs. Striking the perfect balance between growth and containment (vis-à-vis budget deficit reduction) became the policymaker’s dilemma. The idea that a considerable increase in development expenditure could help achieve the desired objective of growth gained currency. The recommended line of action was to invest in projects that would generate considerable employment and have substantial secondary multiplier effects.

On the revenue-generation front, widening the sales tax base, doing away with exemptions and a correction in the tax structure so as to ensure equity were measures suggested by experts. Increased tax revenues would pave the way for a reduced budget deficit provided that GDP growth picks pace. Hence, stability in the fiscal system would be achieved through growth as opposed to the IMF endorsed doctrine of austerity.

Moreover, the removal of subsidies and SROs was strongly advocated due to the substantial political capital gained by the party in government. The balance of payments crisis that has been a hang fire over the past 5 years heightened the angst as State Bank of Pakistan’s reserves came down to cover only 1.5 months of import bill payments. Inheriting a messy economic situation put the PML (N) in hot water the day that it took over especially as the campaign revolved around assuring the voters of a roadmap to a better tomorrow.

Economic experts understand that there was no ‘one size fits all’ kind of solution to Pakistan’s economic predicament and they appreciate the circumstances in which the budget was announced. By giving their valuable insight, they are providing the government with food for thought as well as a reality check. With greater attention being paid to the opinion of the masses and experts and four more budgets down the road, there is hope that the government will be as responsive as it has been empowered.

Click here to read further:-

Understanding Post-Budget Mood Swings – Part I

Understanding Post-Budget Mood Swings – Part II (Section II)

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