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Pakistan’s Pre-Budget Preview

June 4, 2015

Like always, next FY Budget too will surely be rosy. By tying knot with IMF, Federal Budget will have nothing significant to offer because of its tough commitment to obtain funding.

To correct economic anomalies, focus should be purely on how to plug loopholes and instead of relying on borrowings, hence increase revenue to fill financial black holes.

Failing to live up with the expectations of much needed relief will bring further disappointment and depression among the unemployed and lower segment of the society, which consists of large part population. With so much hype of economic recovery, the real challenge is to announce and deliver.

It is regrettable that for nearly a decade, Pakistan’s economy is faced with cash crunch (domestic and external), as government spending exceeds revenue, causing budget deficit because of non friendly Fiscal and Monetary Policy.

This situation has arisen because respective governments during their tenor remained focused on managing their books. I have frequently raised occurrence of this problem through my columns, which is caused by deviating from established Standard Financial Procedure, commonly known as Creative Accounting.

Evidence of weak economic policies of past and present is clearly visible, resulting increased government borrowings, almost halting private sector growth. This is why shamefully Central Banks profits is either at par or have exceeded private sector lending, as banks are forced to make investment in government paper.

Take a look at another example that why credit expansion has thinned down despite SBP’s constant liquidity injection. Commercial Banks portfolio of advance/deposit ratio (ADR) of past few years is clearly tilting downwards hitting Rs 8.747 Trillion versus Rs 4.472 Trillion, which is 51.13 pct. The drop in ADR by almost reached 22 pct in last 10-year is another valid proof of weak fiscal and monetary policy, responsible for rising unemployment and poverty rate, low revenue collection and high fiscal deficit that helped to push inflation and Discount Rate at extreme highs.

The proof of the pudding is in the eating. Here is the economic disconnected and to determine the total damage caused to the economy can be derived from country’s total debt that has breached 60 pct limit.

In 2005 total debt (external and domestic) was Rs 4.191 Trillion. In 10-years time, by the end of FY 2014-15, Pakistan’s total debt has surged by Rs 14.352 Trillion to Rs 18.543 Trillion. Then (2005) annual cost of debt servicing was Rs 300 billion against FY 2014-15 (current) cost of Rs 1.2 trillion (approx).

Sharp surge in Debt to GDP ratio is alarming that was brought down from 88 pct in 2001 to 57.8 pct in FY 2006.  But since then it is constantly climbing and has comfortably breached the 60 pct benchmark debt limit, to hit the highs of 63.8 pct (current), which is in violation of fiscal responsibility act.

So where do we stand now and what needs to be done? The end result of this obnoxious policy is that the annual population growth is nearly 4 million. Recently released jobs data shows surge in unemployed rate to 8.3 pct or 5.3 million people do not have jobs. In true sense more than half of the population is homeless, which means based on housing residential density @ 6.5 people per family, there is a shortage of 15 million homes that have proper roof.

The latest survey on education recommends that internationally key focus has shifted towards children education rather than focusing on universities for having strong base and successful development of the country. This recommendation ideally suits our country as data of base education is extremely poor.

Poor education and lack of funding is one of the major causes of all social and economic ills. Unfortunately, after 18thamendment, provinces have greater responsibility as they are supposed to provide 80-90 pct of the funding requirement. Education policy needs to be revisited on urgent basis, as minimum funding of 4-6 pct of the GDP is needed to make amends.

Subsidy culture is one of the big causes of economic distortion. Though it is common and popular even in developed economies, but for our economy it is a disaster because it is being misused. The simple purpose of subsidy is to ease burden. In Pakistan, the cost in shape of circular debt is roughly Rs 300 billion, for agriculture and agri products another Rs 70-100 billion is allocated. In shape of SRO’s it is roughly around Rs 350-400 billion, which totals to around Rs 800 billion.

It is difficult to determine the exact cost, but food and agriculture support price is also part of subsidy, as it directly affects both consumer and taxpayers and is a huge burden for the nation that suffers from a very high poverty rate.

The roar about investment in energy sector that will change life of a common man sounds good and is encouraging. But cost of adding another 10.000 megawatt (mw) of electricity by using coal would mean that for gasification purpose, generators will be used. Here is a double catch, as increased funding will be required to operate generators and secondly what is the strategy to halt rise in Circular debt, which then would surpass Rs 500 marks?

Government that always boast and take credit of Stock market boom should play fair. Capital gain tax and bonuses should be taxed at par with bank’s individual savers @ 10 pct. Stock market capitalization has already almost doubled to Rs 71 trillion.

Rather all income should taxed at a fair rate, which can only bring respite to country’s financial woes.

IMF program, which is never pro-growth, is a thorn in flesh and if government is seriously considering stimulation of economy, the strategy should be made so that it can get rid of it at quickly as possible.

Finally, nothing can be achieved without documentation of economy, which is mother of all the ills. The challenge in immense and the task is daunting unless current taxpayers number is increased sharply, which is a sheer joke. Tax payers should be increased from current number of 840.000 to minimum 10 million. Indirect taxation is not the solution.

Recent query and surprise shown by the FBR due to investment in real estate abroad is not a matter of big concern, as US Dollar can easily be purchased from KERB market. It is caused due to policy flaw that has encouraged Pakistanis to invest abroad. Investor’s preference to invest in property aboard is simply because of inflated real estate prices in Pakistan. Cost of property of equivalent size and value is 25 pct higher in Pakistan that Dubai or elsewhere.

Since, investing abroad is cheap, investors feel safe and comfortable, as they get visa and other facilities too. Pakistani government is not helpless. Instead, it is lack of willingness to correct all wrong doings, due to greed and weak policies.

Lastly, it is very disheartening that despite continuation of economic woes for years more than 50 pct of the budget committee members or budget experts consist of same old faces that we have been witnessing since last many years.

Then the real question is that why there is so much of hue and cry, blaming policies of past governments when the present government itself is not keen to bring the required changes? What positive alteration will the same old faces bring for the well being of the people? Why respective governments are always shy to add new team of experts to bring new ideas to transform and improve the economic condition? For how long will the nation be fooled/trapperd for the economic adventurism, which is bound to bring more misery than relief?

Give a serious thought and act in the best interest and well being of the nation, so that we can once raise our head with pride, honor and dignity.

 

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