Understanding Post-Budget Mood Swings – Part I

Spearhead Analysis – 16.07.2013

By Enum Naseer
Research Analyst, Spearhead Research

Part-I

Pakistan budget 2013-14The Federal Budget for FY2013-14 became the most awaited announcement after Election 2013 as the country sailed past repeated May-day scenarios. With election day emotions taking a back-seat, the national mood rocks between extreme ends. The finesse with which priorities were set amidst turbulent conditions has become the object of public scrutiny as the masses try to understand the plan for all that it is.

The game plan is announced

Rarely does the announcement of a federal budget elicit a unanimous desk-thumping response across the board. Chances become even bleaker when this happens in a country where a complex political and economic mélange reduces national aspirations to buoyancy and achievements to good fire-fighting. Pakistan’s democratic history reached another climax last month with the announcement of the much hyped game plan: the federal budget for FY2013-14.

Ambitious targets were set and changes made in expenditure and taxation plans to fix an economy that was facing gargantuan challenges such as rising external debt levels and fast depleting exchange reserves. The rupee was already under a lot of pressure and the cost of servicing debt was spiraling out of hand. The economy still continues to be in a critical condition with foreign investments plunging to lower levels and the burgeoning fiscal deficit. It is in such circumstances that the government attempted to apply a balm to undo the effects of the mismanagement of previous years. While the announcement of the budget is a routine duty that the constitution demands of the government, this time around it has come amidst great enthusiasm for embarking on a path of self-correction. Spirits were high and expectations climbing as the party of ‘economic revival’ took over.

Some measures are dubbed sound

The PML (N) has asserted that it has tried to bring about fiscal discipline through various measures proposed. It focused on power generation and creating a climate that is conducive to attracting investment and increasing business activity. The defense budget, for example, has been increased to Rs627.2 billion in wake of rising security concerns.

The government has even gone far enough to announce that it will eliminate circular debt- a problem that has arrested growth in the country in a time span of just 60 days which is an ambitious yet encouraging statement to make. In addition to this, Rs225 billion have been allocated for a variety of power projects out of which Rs59 billion will be used for power projects in the water sector e.g. Gomal Zam Dam (South Waziristan), Rainee Canal (Ghotki and Sukkur), Kurram Tangi Dam (North Waziristan) and Ghabir  Dam (Chakwal) to name a few.

The budget laid a special emphasis on major infrastructure development much in line with the economic vision of the PML-N. Development funds have been increased by 50% to Rs540 billion which will be spent on the construction of the Karachi circular railway, the Iran-Pakistan Gas Pipeline, Nandipur power project, and Ashiana housing scheme. The government has also planned to set up Export Promotion Zones and industrial estates to give a boost to the industrial sector. There is also talk of an exemption certificate for the import of raw materials used by the manufacturing sector to help exporters. The government is also trying to reduce the import bill by encouraging the use of hybrid and energy efficient cars through reduced customs duties.

Also, as part of its austerity program, the Prime Minister House has reduced its expenditure by 44% and the Prime Minister Office has cut its expenditure by 45% which means that the government is willing to take the road less travelled to pull the country out of the quandary. In a historic move, the prime minister has abolished his discretionary fund (worth more than Rs42 billion) and the secret funds of 12 ministries. In addition to this, on the revenue-generation side, the government has announced an increase in the percentage of income tax for people earning more than seven million per annum.

The budget also talked of youth welfare programs e.g. the Free Laptop scheme, the national internship program, cheap loans for young entrepreneurs and Qarz-e-Hasana. Moreover, the government has decided to continue the Benazir Income Support Program albeit with a changed name.

Disappointment on a few fronts

It is true that the performance of the previous government was well below par and PML (N) had only 5 days to present a budget but it also holds that the party had a good 13 year long thinking period to understand Pakistan’s problems more deeply. Also, the fact that it was a part of the previous system by being in the government in Punjab makes it more insightful about the way things work in the current scenario. Hence, little leverage was allowed to the party by those who find the budget a disappointing document.

Most of this criticism is related to revenue-generation measures proposed by the government where no major restructuring of the taxation system was undertaken despite having won a mandate heavy enough to do so. An increase in the General Sales Tax by 1%, while a speedy revenue generation measure in itself, has had an inflationary impact that the majority of Pakistanis cannot afford to bear. The move is one that endorses an inequitable tax structure especially in the absence of capital gain tax for rich stock brokers for instance. Furthermore, the concern that the cost of production will surge thereby marring competitiveness of Pakistani exports in global markets is a valid one especially as the balance of payments situation continues to paint a gloomy picture.

Additionally, the implementation of the Federal Excise Duty on imported edible oil and canola seed is seen as a measure that will increase inflationary pressures instead of reducing Pakistan’s import bill by a significant amount. Another widely-criticized move is taxing professionals earning more than Rs 7 million p.a. while forgoing taxation of the feudals’ agricultural income.

The National Sentiment: the pendulum sways

The response to the budget was mixed: sections of the society emphasized that the document was the best possible plan given Pakistan’s economic predicament, that the demand for providing relief to the common man was unfair to a government that had inherited an economic mess. The other side, however, argues that the government has again handed the bitter pill to the masses and demanded them to offer a greater sacrifice than they can afford to while the elite has been protected.

The national sentiment is ricocheting between extremes as the masses try to understand the document together with the context.  More than a month after the budget was announced, it seems still too early to comment on what the future will look like. In any case, Pakistan has fallen prey numerous times to a widening policy formulation-action deficit and there are still many questions about how the proposals announced are implemented. The masses will support bold corrective measures and will be more than willing to gulp down one bitter pill after the other if faith in the benefit of their sacrifice is restored. Additionally, keeping an open mind and a pro-active orientation will work best in the favor of the government and also in-sync with the ideals of a true representative democracy.

Click here to read further:-

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

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

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