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Budget Perspective FY 2017-18

May 22, 2017

Asad Rizvi 

“Budget” is knocking at the door, which is an annual feature. The only thing special about this coming event is that it’s going to be Election Year Budget, which is most likely to offer some sort of fiscal relief to gain popular support by burdening the exchequer.

It’s a common election strategy practiced almost all over the world. But the worrying part is that increased government spending will add pressure on the national kitty, as resources are scare due to low revenue collection and poor export receivables.

Presentation of government’s financial plan will simply be a proposal about its projected revenue and spending. Sadly, due to extremely tight liquidity condition (Domestic and External) and highly inflated debt ridden economy, our National Budget is no more going to be an exciting event.

There is a high probability that rules will be further tightened on Direct Taxes. The need of hour is that the government should go for an all out attack on Tax evaders as aggressive strategy of Budget Tax Crackdown is the only option to raise taxes.    This August, Pakistan will be celebrating its 71st year of independence. Thought provoking question is that during all these years what did the nation achieve in economic sense? It is embarrassing that we cannot proudly highlight any specific notable economic achievement.

It is because all these years focus of respective governments has been on bragging, self praising its economic performance without realizing the real problem faced by the large part of the population, which is housing, population, health, food, education, water, energy, transportation and communication.

For how long will the economy survive on castle of false hope? The truth is that present shape of our economy is the political outcome of decades old clientelistic policies at the expense of fiscal sustainability and social injustice.

In Pakistan, greed has risen sharply to such an imaginable level that corrupt elements have become more influential on the basis of wealth. They should be eliminated through legislation.

Government will have to realize that in such a situation temporary standard solutions do not work in favor of bottom 75-80 pct of the population that live below or around the poverty line.

Historical Budget Data suggest that Pakistan’s annual financial targets are always forcefully met after filling of the gaps through adjusting entries due to funding shortfall.

Pakistan’s rising Debt figure (Domestic & External) and annual Debt Financing Data depicts true picture of the worsening economic condition. It is due to lack of economic support caused by corruption and poor governance, structural imbalance in economy, inefficiencies and trade barriers (national crops/support price).

The real threat is that the economy is fully exposed to various elements, whereas sizable part of Domestic Economy is undocumented that does not support the cause, which makes Pakistan’s economy more vulnerable to both internal and external factors.

It is extremely important to ascertain and address the root cause of economic problem that why Pakistan’s growth rate of 4-6 pct is not sufficient enough to counter odds and why fruits of growth are not reaching across the poverty line.

The benefits of current growth will never reach the poor of the society unless fundamentals are checked and corrected. Simply celebrating growth in overall percentage term is meaningless and misleading as it never depicts true picture of the economy.

Why majority of the people are suffering?

It is because despite Pakistan’s growth rate historically averaging around 4.25 pct, its living standard have gradually squeezed due imbalance caused by high inflation, weak wage growth and weak Rupee, which was/is never adjusted in same proportion.

The truth is that over last 10-years as per State Bank data, private sector growth has been very weak. Drop in Advance/Deposit Ratio to 51 pct tells the sad story about bank lending to private sector, as banks have parked major part of their deposit in government paper.

Therefore, instead of totally relying on CPEC, policy makers should focus on Private Sector growth in an aggressive manner. Commercial Banks cannot dictate SBP or MOF, as all they needs to do is to reduce cost of financing by slashing Discount Rate and Coupon Rate. Remove the floor rate and or further widen the SBP Corridor floor/cap gap after slashing the Discount rate as 6.25 pct is too high that will help in adjusting the SBP Target Rate.

Simultaneously give a time frame and put a cap on investment in government securities. This strategy will definitely see return to robust economic activity, as bank lending will surge sharply.

GDP Data Accuracy

Accuracy of Global GDP numbers are frequently disputed because good part of statistics contradicts theory or actuals. In present times economist/analyst think China and India is a suspect.

Greece was responsible for initiating 2008 European turmoil through creative accounting with the help of special swap arrangement by applying fictional exchange rate i.e. it issued other currency bonds for its Euro needs that exploded. Similarly, in past with the help of US Banks, Italy opted for same strategy to mask its widening debt. And in 2014 accuracy of Japan’s GDP against official data of 0.9 pct fall was disputed as BOJ projected 2.4 pct actual growth.

This is not an accusation, but Pakistan is often blamed for manipulation. More importantly the point is that at some point Pakistan will have to repay, reduce or manage its debt at some stage and it is then when disaster will occur.

There are plenty of Fiscal/Monetary Policy related queries pertaining to Pakistan’s economy like adjustment of Circular Debt as Rs 315 Billion is one pct Deficit and it certainly impacts growth rate. This is a permanent problem that needs to be sorted out. 

Key Areas that need immediate Attention

-What is the funding source of annual Deficit Financing and for how long will the country survive on borrowed money (External & Domestic)?

-If estimated inflation rate for next 2-years is around 5 pct and FM dose not see inflation pressure then why government is paying excessively high return on its 5 year and 10 year bond coupon, which is double of the inflation rate, as it is one of the major causes that has led to higher debt?

-And if the inflation rate is so low then why is SBP not making downward adjustment of Discount Rate and Target Rate to give further breathing space to business activity and reduce government’s expensive borrowings?

-If 8.000 to10.000 MW of energy is added in the system, then fuel cost at current price will increase by roughly USD 3.5-4 Billion. How will the country manage to pay this excess fuel bill? Budget paper should provide details.

-Providing subsidy is a common solution to business community’s demand at taxpayer’s expense. Budget paper should provide detail of estimated subsidy amount and the cost to be beard by exchequer along with projection that against subsidy how much will the business community pay back in return in terms of employment, tax and foreign exchange.

-After allocation of subsidy it should be clarified that no concession of any sort or bank support will be extended on earlier subsided product and those found protesting will be panelized and deprived from future rebates or any type of concessions. It will be Governments prerogative to make policy changes in best national interest.

-Budget paper should give reasoning for government’s Media Advertising Spending Plan that why and how much it wants to spend and highlight its project in Print and Electronic Media, when the project work was a commitment to the nation based on its election manifesto. Budget paper should also tell that how the nation will benefit from these Ads, which is taxpayers money.

-Since budget is all policy proposals for undertaking government expenditure, it should provide estimated amount and detail of all Domestic and External Borrowings for FY 18.

The paper should also give reasoning of both (internal & external) borrowings. It should elaborate that how borrowing will ultimately benefit government and when and how it will help to get rid of loans.

Managing of Fiscal Affairs

Monetizing of government borrowing through purchase of government paper has reached extraordinary high levels, which is Rs 8.62 Trillion (outstanding stock) of which only 20 pct is of Non-Banks/Corporate and 80 pct Holdings of GOP Securities is of Schedule Bank or is 78 pct of total Demand and Time Deposit., while share of Bank Lending to Private Sector is mere 51 pct.

Since we are Deficit Economy it is important to understand that to manage Fiscal Affairs, Money is created out of Debt by Central Bank, which is paid backed (Debt plus Interest) unless available cash in economy is in surplus. In this situation keep a close watch on Money Supply, which is always high.

This is why SBP plays key role and is responsible to manage liquidity in the banking system. But it does not own the debt. Instead, in a way SBP is Governments Private Bank, as they cannot offer free money, hence in exchange Bond is created. And remember whenever, we say “Bond”, it always refer to “Debt”.


In my “Outlook 2017”

My growth projection for FY 16-17 was 5.25 pct. I did not agree with the governments projected growth target of 5.7 pct. It is a sad moment that government had to make downward revision of its growth target to 5.28 pct.

For FY 17-18, Government is targeting 6 pct growth. I will stick to my earlier forecast that in next two quarter (July-Dec 2017) I see growth rate of 5.35 pct or better. Election year funding will play key role to push growth rate notch higher, but still 6 pct growth looks tough to me unless Discount Rate/Target Rate and Coupon Rates are slashed. Floor of SBP interest rate Corridor is removed or further lowered. Aggressive and targeted Bank Lending to Private Sector and Agriculture Sector is required to push growth higher. Or else discussion will move around CPEC and growth could flatter around 5.25-50 pct.

Unfortunately, Pakistani industry is inefficient as focus is primarily on low margin goods that requires low skilled, low paid workforce. Pakistan would continue to move in snail’s pace unless leadership is visionary in broader sense and move fast towards industrialization such as electronics or modernization of its ship-breaking industry or bring revolutionary changes in agriculture sector instead of depending rebates and subsidy.

Revamping of outdated education sector along with changes of amateur, uneducated management is a necessity. We have to shift our focus from, Social Studies, History, and literature, Civics or Political Science. These should be secondary subject as Physics, Chemistry, Computer Science, Electronics, Industrial Design, Metallurgy, Engineering, Finance, Management and Quality Control. To excel in education this is where Finland, China, Germany, Singapore and Korea are focusing to groom their young generation.


(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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