Budget Challenges for 2012-13
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.