Spearhead Analysis – 31.05.2017
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
After the release of the somewhat lackluster Economic Survey for 2016-2017, the much anticipated Fiscal Budget for 2017-2018 has been presented – the last budget to be presented by the incumbent Government as its term comes to an end in 2018. Surprisingly, there have neither been any protests nor any apparent discontent after the Finance Minister presented the Budget. It would appear that for once “all is well” in the land of the pure and the pious.
The Budget is building up on a weak edifice of the Economic Survey, which in itself is a somewhat difficult task. The fact is that as per the Economic Survey the government fell short of most fiscal targets:
- The economy grew by 5.3% versus a target of 5.7%.
- Fiscal deficit rose to 4.2% versus a target of 3.8%.
- Current account deficit rose to US$7.25 Billion till April 2017; and, is expected to rise to US$8.3 Billion by year end.
- External borrowings, are at US$11 Billion; up US$3 Billion over estimates.
- Exports estimated to be US$21.5 Billion, are below a target of US$24.75 Billion.
- Workers’ remittances at US$19.5 Billion are below a target of US$20.2 Billion.
- Investment-to-GDP ratio at 15.8% is below the target of 17.7%.
- Savings at 13.1% of GDP are below the target of 16.2%.
- Contribution of the agricultural and industrial sector was 1.74% with their share in the GDP having fallen.
With almost all key indicators in the red there was hardly any improvement in the healthcare, education or literacy rate. It is indeed a poor reflection on performance that the government was unable to keep its promises to observe provisions of the fiscal responsibility law. On the face of it these numbers portray a weak base for building a sustainable growth strategy and a Budget.
The salient features of the Fiscal year 2017-18 Budget include:
- An economic growth forecast of 6%.
- A Fiscal deficit target of 4.1% of GDP.
- A tax collection target of Rs. 4,013 Billion; a 14% growth over the prior fiscal year.
- An increase of 4.3% in other taxes and 7.4% in non-tax revenue.
- Estimated provincial surplus of Rs.347 Billion.
- Total subsidy amount below the actuals for 2016-17 by 18%.
- Provision for mark up on domestic and foreign debt held at 2016-17 levels.
- Civil government and defence employees increase in emoluments of 10% and 20%, respectively
- The government needs to focus on expanding the tax base as opposed to implementing regressive policies for enhancing indirect taxes.
- The fiscal deficit has to take into account almost Rs.700 Billion in Circular debt that has not been paid. Of this amount around Rs.400 Billion plus has been added after the repayment of Rs.480 Billion in 2013. The Prime Minister in a recent Cabinet meeting has ordered a special audit of fresh circular debt claims of Rs.480 billion and third-party analysis of the power demand-and-supply situation on the basis of projects that are coming up for commercial operations.
- There was news that the ministries had asked for a development budget of around Rs.875 Billion, which was then boosted to almost Rs.1 Trillion. Such ‘extravagance’ might have to be cut, which would have an impact on infrastructural development.
- The expenditure on debt servicing is likely to rise during the year with additional borrowings to meet the expected higher fiscal deficits.
Dr. Ashfaque in a recent article has reiterated Pakistan’s worsening balance of payments situation. He has identified two main reasons for the deterioration in the current account deficit for the first ten months (July – April) of the current fiscal year to US$7.247 Billion (US$2.378 Billion in the comparable period last year):
- The decline in exports on the one hand and the surge in imports on the other.
- Significant decline in external inflows, such as Remittances and Coalition Support Fund (CSF).
Exports have declined by over 12% from over US$25 Billion in 2013-14 to less than US$22 Billion in 2015-16. Exports are down by 1.3% in the first ten months of the current fiscal year and expected to touch US$21.5 Billion by the end of the fiscal year. The competitiveness of Pakistani exporters in international market continues to be eroded.
A persistently overvalued Rupee exchange rate has encouraged imports despite the reduction in oil import bill owing to the decline in international oil prices. As compared with 2013-14, Pakistan has saved over US$13 Billion in the last three years owing to the decline in oil prices. During the first ten months (July – April) of the current fiscal year, Pakistan’s imports registered an increase of 15.5% to reach US$38 Billion.
As per Dr. Ashfaque Pakistan is expected to face serious balance of payment situation in 2017-18:
- Current account deficit expected to remain in the range of US$12.5–13.5 Billion.
- Debt servicing requirement expected to rise to US$9.0 Billion.
- Total financing requirement expected to be in the range of US$21.5–22.5 Billion.
- Expected availability of external financing estimated at US$12.5 Billion.
- An expected financing gap of US$9-10 Billion.
- External debt and liabilities expected to cross US$90 Billion by end-June 2018.
The Finance Minister has reiterated his resolve to observe provisions of the fiscal responsibility law and to also strengthen its provisions, something that could not be done last year. The fact is that the external sector and inflows continue to exhibit an adverse trend. Exports continue to decline; workers Remittance are stagnant-to-declining; FDI has shown very modest improvement; Imports continue to rise on the back of an artificially popped up Rupee; and, the debt servicing needs and repatriations are on the rise.
With increasing pressure on the Balance of Payment, there is little clarity on how the fiscal shortfalls would be met. In the outgoing year the government was forced to place reliance on borrowing from Banks at commercial rates for short durations, which is not an ideal solution. Revenue generating capacity has to be enhanced and for that exports have to rise, imports have to be curtailed, FDI has to increase and the all-important tax base has to be expanded, as opposed to continued reliance on an over-stretched regressive indirect tax system and short-term commercial bank borrowings.
The concessions and subsidies to different sectors in an attempt to jump-start productivity are not long term solutions. There is a need to improve the capacity not just in terms of infrastructure, but also in terms of improvement in the basic human capital to provide the much needed growth stimulus. It is absolutely vital to upgrade and adopt modern technology and knowledge to enhance competitiveness. Perhaps the Chinese intervention as per the Long Term Plan would help address such shortfalls through the setting up of the Export Zones and introduction of technological advancements.
There federal development budget has been raised from a level of Rs.800 Billion to Rs 1 Trillion, channelizing public spending towards development projects. It is not clear how this increase in the budget would be funded. The PSDP remains focused on transport – roads and highways, while the allocation for the power sector has declined from Rs.75 Billion to Rs.60 Billion. There is an increase in funding for HEC from Rs.21.5 to Rs.35.6 Billion. Healthcare has seen an increase from Rs.25 Billion to Rs.48.7 Billion. There is also a massive Rs.242.5 Billion for discretionary special schemes such as PM’s SDG programme, Special federal development programme, Energy and Clean Drinking Water for All, a separate special provision for CPEC, PM’s Youth initiative and so on.
The Budget can at best be termed optimistic. The sizeable allocations for discretionary programmes is geared towards vote gathering. The fact is that Pakistan’s economy has been under-performing for a number of years. In a country with a burgeoning young population there is a dearth of employment opportunities and the economic activity has to pick up. Ongoing issues such as the power shortages, healthcare, education and water alongside the infrastructure gaps are leading to lower productivity and a lack of competitiveness. The focus needs to be on bringing about long-term sustainable improvement for growth. The budget appears to be a maintenance of the status quo with the focus yet again on the traditional underperforming sectors such as agriculture and textile. The targets set by the government appear to be unachievable and the balance of payments, debt, and fiscal deficit are likely to worsen in the coming year.