Bud­get Chal­lenges for 2012-13

Enterprise - - Editor's Desk -

The Pak­istani econ­omy is cur­rently caught in an in­hos­pitable en­vi­ron­ment, both on the do­mes­tic and ex­ter­nal front. Bud­get plan­ners are faced with a num­ber of is­sues, such as pro­vid­ing re­lief to the com­mon man, find­ing a so­lu­tion to the cir­cu­lar debt that has en­trapped the en­ergy sec­tor, pro­vid­ing sub­si­dies for the power sec­tor, elim­i­nat­ing mas­sive cor­rup­tion and tax eva­sion and im­pos­ing agri­cul­tural tax.

The econ­omy has, in fact, never been in a worse state than this. Pak­istan has failed to achieve ma­jor pol­icy ob­jec­tives to re­duce fis­cal deficit at or be­low 3.5 per­cent of the GDP and im­prov­ing tax-to-GDP ra­tio to 12.7 per­cent by 201213. The World Bank in its mid-term progress re­port has said the fis­cal deficit tar­get had now been set at 5.5 per­cent for 2013-14, down from 6.6 per­cent of the GDP in 2010-11. In­stead of grad­u­ally mov­ing down to four per­cent, the fis­cal deficit has risen to 6.3 per­cent of GDP due to lower eco­nomic ac­tiv­ity, less than ex­pected rev­enue mo­bi­liza­tion and con­tin­ued un­tar­geted sub­si­dies, par­tic­u­larly in the power sec­tor and other loss-mak­ing en­ti­ties.

It is un­for­tu­nate that fis­cal in­dis­ci­pline con­tin­ues in Pak­istan for which the coun­try is pay­ing a heavy price. The in­vest­ment rate, which is the in­vest­mentto-GDP ra­tio, de­clined to 12.5 per­cent in 2011-12, which is the low­est in sixty years, as against 22.5 per­cent in 2006-07. For­eign pri­vate in­vest­ment has sim­ply col­lapsed from as high as $8.4 bil­lion in 2006-07 to $ 0.5 bil­lion in the cur­rent fis­cal year. Do­mes­tic sav­ings de­clined to 5.8 per­cent of the GDP in 2011-12, which is per­haps the low­est in the coun­try’s his­tory (it was 15.6 per­cent in 2006-07).

The coun­try’s eco­nomic growth has been at an av­er­age of 3% per an­num over the last five years. All other ma­jor com­po­nents of eco­nomic growth have shown mis­er­able per­for­mance. Agri­cul­ture growth has av­er­aged at 2.2 per­cent per an­num, al­most equal to the coun­try’s pop­u­la­tion growth. Large scale man­u­fac­tur­ing grew by only 0.7 per­cent, on av­er­age, and the ser­vices sec­tor reg­is­tered a growth of 3.8 per­cent per an­num dur­ing the same pe­riod. This is bound to cre­ate a se­ri­ous un­em­ploy­ment sit­u­a­tion, lead­ing to in­crease in poverty.

The bud­get-mak­ers seem to be un­able to gen­er­ate the needed re­sources for in­vest­ing in the econ­omy. It seems Pak­istan is head­ing to­wards an­other ex­ter­nal pay­ments cri­sis, which means the coun­try would need a size­able flow of ex­ter­nal re­sources. Pay­ment needs for 2012-13 have been es­ti­mated at $10 bil­lion, well be­yond the coun­try’s cur­rent ca­pac­ity to pay. While work­ers’ re­mit­tances have done very well this year, they are not enough to fi­nance the ex­ter­nal deficit. Other sources of fi­nance — in par­tic­u­lar of­fi­cial de­vel­op­ment as­sis­tance from the United States — can­not be re­lied upon.

The 2012-2013 fi­nan­cial year will co­in­cide with the last year of the cur­rent gov­ern­ment and this will make it dou­bly dif­fi­cult for the gov­ern­ment to bring about a struc­tural change in the tax sys­tem. The coun­try now has a well de­vel­oped cul­ture of tax avoid­ance. This has been pro­moted by such fac­tors as the tax au­thor­i­ties not hav­ing the means to en­sure com­pli­ance and the gov­ern­ment’s fail­ure to draw more peo­ple into the tax net. It is, there­fore, cer­tain that fis­cal deficit, in­creas­ing in­fla­tion, en­ergy cri­sis and debt ser­vic­ing will re­main the key chal­lenges for bud­get-mak­ers for 2012-13. To meet these chal­lenges, it is rec­om­mended that the gov­ern­ment take steps to in­crease rev­enues by widen­ing the tax base, bring into place a min­i­mum tax regime, en­sure en­ergy sus­tain­abil­ity, in­sti­tute macroe­co­nomic re­forms, act force­fully to re­duce cir­cu­lar debt, en­sure safe­guards to kick start in­dus­try and open trade with In­dia and other coun­tries.

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