Jul 25, 2011

Opportunities and challenges

Drastic but consistent economic measures need to be taken to achieve fiscal targets

By Dr Syed Nazre Hyder and Faisal Nadeem Gorchani

Never before, it seems, had the country ever experienced such a grave financial situation when the economic managers might have felt that budgeting of economic resources is beset by so many challenges and complexities amid very few available options to pull out the economy from the edge.

In today’s context of the country, which involves lowest growth of GDP, an all-time highly declined investment in Public Sector Development Programmes (PSDPs), energy crisis, and high incidence of circular debt will significantly impact the budget decisions.

Other factors, which are not so much of our making, such as the quantum rise in the prices of petroleum and its products, vagaries of nature in the form of most devastating 2010 floods, and heavy expenditure due to war against terror have further complicated the state of economic affairs.

However, despite all these serious challenges, the problems are not so much due to lack of resources but because of poor governance and increased volume of non-productive expenditures besides lack of desired level of competence and a missing commitment of concerned government functionaries. These are the key factors responsible for country’s abysmal economic situation which need to be addressed in the budget.

The fiscal deficit, which had been most adverse during the recent years, is again found widening much higher than the original and revised targets despite taking some measures to strengthen the budget execution.

Although significant reforms in the tax administration regime have been taken to improve the volume of tax collection, these are not only short of targets but also have led to form the lowest tax-GDP ratio as compared to other developing countries.

This is one of the prime reasons of widening the gap between the volume of revenue collection and the size of expenditures, resulting into fiscal deficit and weak macro-economic framework. There is an apprehension that the fiscal deficit is likely to end up by 6.2 or around of GDP which may not only have very adverse effects on the economy but may leave a very damaging impression on the credit agencies.

The devastating 2010 floods, payment of heavy inter-corporal debt in the energy sector and very huge sum expenditure to maintain law and order, including war on terror have also a very negative impact on fiscal deficit. Subsidies to the public sector enterprises and recent efforts to keep petroleum prices lower in the country have also proved instrumental in budget deficit.

There are key challenges of efficient use of resources and their allocation along with improvement in governance which is at its lowest ebb. According to one estimate, at least Rs300 billion can be saved by plugging leakages and irregularities in public sector expenditures.

The budget deficit is one of the most significant factors responsible for inflation which has crossed 15 percent so far, and is believed to have eroded the purchasing power of the country by sixty percent during the last three years.

The development expenditure has been ruthlessly curtailed in an attempt to control the size of fiscal deficit while badly affecting the growth rate. The IMF is reported to be insisting that the budget deficit should be curtailed within the range of 4.3 percent of GDP in the next financial year. It will be a challenge to the economic managers to find ways to stick to this target and also protect allocations to be made to the PSDP.

As regards the debt position, the country is again found slipping into a quagmire of heavy debt. The rising trend was found as its amount rose from Rs7277 billion (57.1 percent of GDP) at end June 2009 to Rs8160 billion (55.6 percent of GDP) as at end June 2010 and to Rs.9470 billion (55.3 percent of GDP) by the end of December 2010. The external debt has increased significantly and a huge amount is being paid to retire foreign debt showing an increase in a short period by 48 percent from the amount paid during the first quarter of the current financial year to the second quarter. The principal amount paid against the total amount and the interest thereon is mounting.

It is a matter of concern that the total debt liabilities have increased manifold. Resultantly, Pakistan is classified as highly indebted country in the region. Indeed, financial assistance provided by IMF has solved the immediate problem of correcting the extremely adverse balance of payment situation along with some positive impacts on the economy but escalating public debt does not bode well for macro-economic growth in medium and long run.

Even at present, the repayment of debt costs about one fourth of the revenues collected by FBR. There is a strong likelihood of further burdening of economy by the incidence of debt when repayment of the existing loan under the Stand-By Agreement will commence in 2012.

During the current financial year, while the economic indicators like the fiscal deficit, growth rate, and inflation are showing negative trends, the data regarding current account balance and the exports receipts are encouraging. The economy posted a current account surplus of $ 748 million during the first ten months of the financial year against a deficit of $ 3.456 billion in the corresponding period a year ago.

The surplus resulted on account of increase in exports despite serious power outages and law and order situation along with the historic record of the overseas workers’ remittances which is over 11 billion so far during the current financial year while the country have no significant policy measures for enhancing the remittances.

It is high time that the economic managers should develop some policy and institutional mechanisms to capitalise such encouraging trends which can ultimately lead the country towards economic betterment and independence. No doubt, it should not be taken as sustainable source for improving current account.

Even in the normal economic circumstances, the budget is considered a most important instrument to give direction to the economy, provide macro-economic stability and determine the growth along with the pattern of distribution of its gains. In the present circumstances, when the economy is passing through a most critical phase of its history today, the nation is looking at the budget whether it may end their economic and social sufferings or may add to their woes. Amid the odds, it is to be seen how the opportunities are carved out by economic managers to ensure optimisation of available resources and from some favourable economic trends emerging recently.

The solution of economic ills should be addressed in the budget through adopting sound and scientific fiscal policies. Unless there are conscious efforts to widen the tax net, instead of focusing on current approach of reinforcing rigorous taxation on existing tax payers, there is hardly any chance of improving the financial resources.

Stringent measures are needed against those evading taxes and submitting false returns to hide their real income. Although the Federal Board of Revenue (FBR) is said to have prepared a list of 700,000 tax-evading people among the high income groups but the success in bringing them into the tax net requires strong commitment of government machinery.

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