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Budget Perspective (FY 2016-17)

May 31, 2016

On June 03 2016, government will announce its Financial Budget (FY 2016-17).  Let’s analyze and discuss some of the key facts that drive Pakistan’s economy.

The truth is that except for those directly involved in business, there is hardly any enthusiasm or interest amongst the general public about coming annual event.

It is because, though Budget Policy Makers of Past/Present Governments discuss issues with business communities, but never disclose/share about its priorities.

While, Pakistani population is exploding, but the pattern of allocation and spending always raises intriguing questions, as area of prime concern such as education, health, welfare and all other matters pertaining to social sector never get the required attention.

BUDGET – MISERY or FLAW
If we define Government Budget and its implement in larger National Interest, the sole purpose of Budget is not only to bring forward the combine spending and receipt of all Federal activities. It should also provide Economic Policy Guideline so that it can influence the economy.

No matter when preparing a Budget, resources are always scarce, but at the time of Budget Formulation it is government’s responsibility to make all out effort to increase Revenue Collection and simultaneously Allocate Funds efficiently by providing protection to Private Sector.

There are three types of Budget, Balance Budget, Surplus Budget and Deficit Budget. Over the past several years, Pakistan is unable to increase its Revenue Collection and generate enough income from its Exports due to Policy Flaws resulting higher spending than receivables.

This situation has compelled to deliver Deficit Budget causing severe liquidity crunch (US Dollar & Rupee).

In Pakistan, Documentation of Economy is a non-serious issue that badly hinders progress at all levels, as respective governments are too lenient on tax evaders for reasons well known to them.

The economic impact of undocumented economy is so huge that it has destroyed country’s financial system, whereas it encourages corruption, nepotism and favoritism.

COMPLACENT ATTITUDE
Apparently everything looks quite normal. While the Budget is knocking at the door, the lawmakers are least worried, as there are no serious economic negotiations going on between legislators, business community and the government.

There is a possibility that government is comfortable because of the following.

-High comfort level is probably because Foreign Exchange Reserves are around USD 21.5 Billion, which seemingly does not threaten imports for the time being.

-According to Pakistan Bureau of Statistics unemployment rate got better to 5.9 pct from 6 pct.

– National Literacy rate climbed to 60.7 pct in FY 15-16 from 60 pct in FY 13-14.

-Sharp fall is expected in Inflation rate, which should drop to around 3.10 pct.

-By Fiscal Year end, Remittances will comfortably surge beyond USD 19 Billion.

-Revenue collection is likely to hit Rs 3.1 Trillion target after imposition of mini budget and SRO’s, as government priority is not on source of collection, which is at pathetic low.

-GDP growth against target of 5.5 pct target will be short by 0.7-0.8 pct due to poor performance in cotton sector on which government has no control.

-Stock market is fueling surge of optimism, which has touched all time high. But stock market boom is a misleading indicator, which is misrepresentation of economic recovery.

History suggests that neither stock market boom contributes towards growth nor its crash has any lasting impact on economy. Plummeting share prices only makes noise and news headline because financially rich individuals and strong institutions are directly affected because of equity holdings that could be investors, banks, or institutions.

Government does care about the individual gains or losses. Individual investor’s contribution only helps to inflate the volume in size.

This is why the national savings ratio is too low and debt is rising at alarmingly high pace, investments are on constant decline. It all indicates that there no economic healing.

CAUSES of POVERTY
A sad reality and a dirty truth is that our political agenda deprives nation from its basic needs. Unstable social and economic environment linking to its freedom is the hindering factor limiting choices, causing poverty to rise and the size of ever growing income inequality inflating.

Immediate question that comes to mind is when political agendas deprive major part of the population from exercising its full right, how can nations develop/grow? Frequent occurrence of our problem is the result of “Power Elite-Model” and adaptation of failed “Pluralist Model”, which does not represent real democracy.

In Pluralism, power is distributed amongst selective groups that include collation partners of likeminded people, professional associations and business lobbyists, but again this section in divided into two-groups, which represents Pluralist Model.

One is “Insider” that is well connected and always represents the government and its stance, while the other group is known as “Outsider”, which is less connected and do not have easy excess to meet the top hierarchy.

Power Elite-Model is Power Elitism that surrounds around nation’s wealthy or filthy rich tribe, limiting distribution of power to a very selective group.

Hence, in Pakistan combination of “Power Elite Model” and “Pluralist Model” has pushed the Nation and Economy in Disarray. People are left with no choices, as they do not have genuine access to basic needs such as food, water, health, education, clothing, shelter, etc. This is why rising poverty trend is very alarming.

ECONOMIC DEPENDENCY
To meet its financial requirements Pakistan’s economy is at the helm of donors. If it does not get nod from various agencies and do not borrow funds from overseas, the economy will get burst.

The biggest problem is unending borrowing need/urge that has pushed Deficit to an extremely dangerous zone. This is because total spending is greater than income, resulting ballooning of deficit, as no serious effort is being made to reduce dependency.

It is no more a minor issue or not cause of concern. It is the only available recipe for any government to survive. In a boarder perspective, if we take a deeper look at the past and present pattern of economic data, borrowing graph will suggest that our economy would have or will collapse if we refrain from Foreign Borrowings.

Present government is enjoying its third term, unfortunately during its all three terms (including current), Governments Budget measure have never helped economy to move from negative to surplus zone.

The causes of overall poor economic performance by respective governments are due to deficiency of powerful vision, lack of focus and directionless policy.

Extremely slow pace of growth in industrial and manufacturing sector and out of date agriculture technology/policy are further causes of Economic Misery. Growth data showing uptick in industrial and service sector or in mining sector is tiny and not very helpful.

It is because despite financially this being the best period of present government due to large oil savings of nearly USD 14 Billion in 20-months in its oil bill, it could not bring much needed positive shift in economic sentiment.

ECONOMIC SPOILER
Ongoing practice of Food Support Price and then further granting rebate to protect exporters from losses is a double whammy. Pushing domestic food prices artificially higher and making it costlier than the international market price for political gains is moral evil.

Such opposing theories questions law maker’s credibility and commitment towards nation. It is one of the major causes of decline in performance in agriculture sector, which makes them uncompetitive in international market.

The purpose favoritism/leniency is obvious, which is at the cost of nation and tax payer’s money. Only a small segment of growers/farmers are the real beneficiary. By not artificially adjusting food support prices, instead of few thousand benefiting, major part of the population (190 Million) would be the net gainer, as price easing will help domestic food prices to fall to its original cost level.

In its 3rd term, it is noted that government is often quick to shift responsibility on external factors instead of taking responsibility for making wrong decision.

This is in context to fall in global commodity, which is blamed for poor exports are untrue. When global commodity is in down trend since last 5-years then why food support price was not adjusted accordingly. Higher prices caused spike in inflation and exerted pressure on Rupee.

Now cotton sector is blamed for fall in exports. Why did everyone opt to keep quite when erroneous decision was made? Why they did not protest at the time of purchase of poor and un-certified seeds? Same goes with pesticides and fertilizer. At decision making time, why concerned authorities did not act?

In coming year, the nation could be heading for another Agriculture Sector Disaster, as reports are coming that approval has been given for Genetically Modified (GM) seeds for growing Cotton, Wheat, Sugarcane etc.
Committing or repeating of such blunder should be avoided, as repetition of such practice will never allow the nation to come out of struggling mode.

Unless stringent laws are made to hold all such corrupt and notorious elements responsible for causing losses to the National Exchequer, disaster is unavoidable.

Another major area of concern is Documentation of Real Estate transaction at a false price, which is sucking blood from economy.

The size of money involved in construction business is so huge that distorts all economic data. In many ways it promotes corruption and nepotism and unless corrected or checked economy will remain in doldrums.

WHY ECONOMIC INCENTIVE BACKFIRES
Absence or lack of accountability is the cause of economic sufferings. In institutions, concept of fines and reward is considered motivation factor. Trend of performance based incentive in banks/corporations encourages staff to outshine and do extraordinarily well.

But experimental economist argues that they have also experienced that imposition of fines have reduced ethical obligation to avoid inconvenience.

Despite both the factors, I think those responsible for causing colossal damage to the exchequer should be taken to task.

I do not have enough reasoning to highlight that since ages why or how Pakistan has developed the habit of borrowing from Donor agencies.

However, it is estimated that the country has so far availed loan facilities nearly 18 times. In 1958 Pakistan IMF sanctioned loan facility of SDR 25 million, equivalent of USD 24.8 million, which was cancelled due to non-utilization of limit. 1st time that Pakistan got seriously engaged with IMF borrowings was in 1988. Then it borrowed around USD 516 million.

Furthermore, in last 25 years, Pakistan was able to Privatized 176 entities and received nearly USD 6.5 Billion, which are peanuts. I do not have the output data and economic contribution, but Pakistan’s outflow of profit and dividend is well above USD 2 Billion annually, while net inflow of Foreign Investments is substantially low.

The overall cost of poor cash management is that Pakistan’s debt has surpassed Rs 20 Trillion marks and its servicing cost is beyond Rs 1.3 Trillion. Annual Circular Debt averages around Rs 250 Billion and Tax to GDP Ratio is Pathetically Low.

CAUSE OF WORRY THAT NEEDS ATTENTION
-After September, are we done with IMF or Government will have yet another go?

-Ballooning Debt and Debt Servicing is alarmingly high. What measures will be taken to reduce Domestic Debt and its Financing ?

-For how long Pakistan will continue its Foreign Currency Borrowing Policy ? When will it end and what is Repayment Arrangement/Strategy ?

-Governments Food Support Price Policy and then Rebate on Exports. How does it contribute to Economy when Support Prices pushes Domestic Prices Higher than International Market Price ?

-Tax to GDP Ratio is at alarmingly low level. Why all Income are not Taxed ? What are the Hindering Factors if any ?

-If Pakistan is able to produce average 20.000 MW of electricity daily by 2018, then what will be source of USD funding to purchase excess oil for production ?

-If electricity production reaches 20.000 MW, then Circular Debt is likely to surpass Rs 400 Billion annually due to leakages and line losses. What is the plan to plug this monstrous number ?

-After Production of 20.000 MW of electricity, what is the Estimated Economic benefit in terms of Employment, Exports and Revenue ?

-Exports are suffering, since last 6-years what serious measures will be taken to increase Exports and what is the Export Target Number ?

-After oil price collapse, oil producing countries are faced with tough domestic condition due to deficit. What is the contingency plan to counter possible drop in remittances inflow and job losses in oil producing countries ?

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction)

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