Budget 2009-2010: an appraisal

Before analysing the budget, it would be useful to have a look at the state of economy. The following is the performance of some of the key economic indicators recorded during the outgoing fiscal year, according to Economic Survey of Pakistan 2008-09:
GDP GROWTH AND INVESTMENT: During 2004-08, Pakistan's GDP had grown at an average rate of 7% which indeed was satisfactory. However, during fiscal year 2008-09, Pakistan's economy has shown deterioration thanks to a variety of reasons including domestic security situation, power crisis and shrinking international demand for Pakistani goods in the wake of global crisis.
Pakistan's real GDP recorded a growth rate of just 2% during 2008-09, falling drastically short of targeted 4.5%. Agriculture and Services sectors have grown by 4.7% and 3.6% respectively. The performance of manufacturing sector has particularly been depressing. Overall manufacturing sector posted a negative growth rate of 3.3%. But the growth in large scale manufacturing (LSM) sector was even dismal, declining to -7.7%. Total investment has decreased by three percentage points, from 22.5 percent of GDP in 2006-07 to 19.5 % in 2008-09, which is a sign of worry for economic activities in the country.
INFLATION: The country is experiencing very high rate of inflation. It needs a low and stable inflation rate in order to stay a desirable growth path. The surge in food prices during the year 2008-09 pushed the CPI to a record level of 25.3% in August 2008 and it remained above 20% until February 2009. Average CPI inflation stood at 22.3% during fiscal year while core inflation was 17.8%. While these are the government figures, independent estimates are actual inflations rates could be even higher, particularly in the case of food and daily use items.
POVERTY, DEPRIVATION AND INCOME DISTRIBUTION: Poverty, deprivation and unfair distribution of wealth remain to be pressing issues. So is the case with opportunities of work. Economic Survey 2008-09 has not come up with any clear figures and poverty is estimated at 30-35% in this fiscal year. Independent estimates are that the real incidence of poverty is much higher, and a large number of people have been pushed below the poverty line in the wake of unprecedented increase in the prices of food and daily use items in the last two years or so. Add to it the disasters like the IDPs crises.
Economic Survey 2008-09 acknowledges the fact that while federal Bureau of Statistics and Center for Poverty Reduction and Social Policy Development have estimated a sharp decline in poverty for 2007-08, these findings are contrary to the finding of international agencies like UN. Access to social services remains low, because of the low spending a percentage of GDP in these two sectors. A UN report fielded during July-August 2008 signals food insecurity worsening in Pakistan.
More perturbing is the distribution of income. Economic Survey does not give the figures of share of income of the top 20 % and lowest 20 % of the population - but lifestyles and living standards indicate gross inequalities. Studies show that 40 % of the land in Pakistan is held by 10 % of the rich feudals. 43 percent of increase in the national wealth goes to 10 % of the richest. Per capita income increased to $1046 in 2008-09 as per the official figures. But it is, by now means the proper measurement of the welfare in any economy.
UNEMPLOYMENT: Unemployment rate as per the official figures is 5%. This is simply ridiculous. The definition of unemployment that government uses includes any person more than 10 years of age working for one hour in the reference period, as employed. Unpaid housewives' are also being counted. Considering the trends witnessed in different parts of the country, the situation is indeed worse than that stated in official documents. Importantly, Deputy Chairman Planning Commission has himself acknowledged that unemployment is up to 40 %.
REVENUES AND TAXES: Rs 898.6 billion have been collected as taxes and revenues during July-April 2008-09, 17.7 percent higher than the corresponding period of the same year, but less than the target. Tax-to-GDP ratio remains one of the lowest in the world, at around 9%. More important is the fact that indirect taxes' share in the total collection is 62 %, while direct taxes are 38 percent, meaning the poor continue to pay proportionally more taxes.
FOREIGN EXCHANGE RESERVES, DEBT AND REMITTANCES: Foreign exchange reserves depleted from $16 in October 2007 billion to just over $6 billion in October 2008. However, after the agreement of new loan of US $7.6 billion with the IMF in November 2008, and subsequent release of the first instalment of about 3.1 billion dollars, forex reserves moving up and by end May 2009 these reached at $11.6 billion. But new loans including the one by IMF has resulted in increasing the debt burden of the country to USD 50.1 billion, and 30.7 % of GDP.
Remittances sent by overseas Pakistanis also played a vital role in stabilising the forex reserves, reaching $6.35 billion during July-April 2008-09, showing a massive increase of 19.5 %, as against $5.3 billion in the corresponding period of this year.
THE DEFICITS: 2007-08 was a year of record deficits for Pakistan, which have seen a welcome decline in 2008-09, but continue to remain very large. Pakistan's current account deficit declined to 8.5 billion during the first ten months of fiscal year, from 11.2 billion dollars in the corresponding period of the previous fiscal year.
While imports declined by 9.78 per cent from 32.05 billion dollars to 29.92 billion dollars, exports also showed a decline from $15.22 to 14.76 billion, or 3.03 %. Due to a higher decline in imports as against imports, the trade deficit narrowed by $2.7 billion, from $16.83 to 14.16 billion showing an improvement (decline) of 15.9 %. This, however, still remains very high.
The government claims to have restricted the overall fiscal deficit to 4.3 % of the GDP in 2008-09, considerably less than over 7 % of GDP last year. Coming to the governance related issues, corruption, lack of transparency, bureaucratic bottlenecks and procedural hassles and non-implementation of policies and plans continue to hamper the economic performance.
However, the most important governance related issues is the severe power sector crisis that has very badly impacted upon the economy, particularly the performance of export oriented industries, throughout the fiscal year 2008-09. In this economic scenario mentioned above, the government has announced the budget with the following characteristics:
BUDGET 2009-10: MEASURES, ANNOUNCEMENTS AND TARGETS Total size of the budget 2009-10 is Rs 2482 billion, higher by 23.5 % percent than the budget estimates of 2008-09. As usual, the major chunk of expenditure, over 1532 billion, goes in to current expenditure. General Public Services get 1189 billion; defence spending has been increased to 343 billion, while size of Public Sector Development Program (PSDP) has been allocated Rs 646 billion (with provincial share of 200 billion). External resources are estimated at Rs 510.4 billion.
The government, while presenting the budget, has announced that it is focusing on the following nine-point agenda:
(i) Macroeconomic Stability and Real Sector Growth
(ii) Protecting the Poor and the Vulnerable
(iii) Increasing Productivity and Value Addition in Agriculture
(iv) Making Industry Internationally Competitive
(v) Capital and Finance for Development
(vi) Removing Infrastructure Bottlenecks through Public Private Partnership
(vii) Integrated Energy Development Program
(viii) Human Capital Development for 21st Century and
(ix) Governance for a Just and Fair System. The budget sets forth the following major targets for the fiscal year 2009-10:
-- GDP to grow by 3.3 %
-- Inflation to be brought down to 9.5 %
-- Total revenue will grow by 15.7 percent, FBR collection is projected to grow by 16.8 percent and tax to GDP ratio will rise to 9.6 percent
-- Fiscal deficit will be contained to 4.6 per cent of GDP, and while including Rs 50 billion to be spent for IDPs, it will be 4.9 % of GDP.
ANALYZING THE BUDGET 2009-10: Any analysis of the budget should keep in view the constraints faced by the government. As mentioned earlier, the country is facing the challenges such as slower growth, governance, security and law and order situation, depression in demand of our exportable goods and higher commodity prices in international markets.
As mentioned in the introduction of this review, it is important to analyse that whether the announced budgetary measures are responsive to the needs of present challenging times, including the revival of economic activities and growth, checking inflation, providing meaningful relief to the downtrodden and so on? And importantly, will the budgetary measures and announcements really result in the realisation of government's own nine point agenda?
However, the fundamental concern regarding the budget of the fiscal year 2009-10 is uncertainty about the availability of budgeted resources. Most of the estimated external resources are pledges and are yet to see approval from respective governments. How the security situation turns out to be in months to come is another major concern. If the full scale military operation going on in Swat and being expanded to FATA prolongs, it will mean the need for more than budgeted resources for the defence and rehabilitation related expenditure.
It would be important to mention here that defence expenditure for fiscal year 2008-09 was budgeted at Rs 296 billion, but the revised estimate indicate a 15 billion rupees escalation in it, moving up to 311 billion rupees, owing to the security forces operation in the last months of the fiscal year. An extraordinary increase in defence spending than budgeted would mean lashing of development expenditures, increase in the fiscal deficit and external debt.
Having a closer look at the budget, one finds that there are not sufficient incentives for rejuvenating meaningful economic activity and growth in the country. Reduction of duty on cement, and decrease in import duty on pharmaceuticals are welcome, but not enough. The much needed shift in the policies being pursued for the last several years remains missing.
There are no effective measures aimed at enhancing the savings, investments and industrialisation in the country. Experts are of the view that without any structural change in the policy and paradigm being followed, the growth target cannot be met although the target itself is very moderate, and even achieved will be insufficient for the goal of poverty reduction.
It needed no emphasis that confidence among the business community at large is very important for reviving the economy and enhancing the growth. However, only selective industries such as textile have been provided protection and support once again, despite failing to prove competitiveness at global level. The business community as a whole has shown strong reservations over the budget. The three employment creating sectors, agriculture, trade and small industries have not been amply focused in the budget.
As far as inflation is concerned, controlling it through tight monetary policy has, by and large, proved a failure. Without improving the supply side and effective measures to control the hoarding and profiteering, inflation cannot be brought down substantially and thus, that target of bringing it down to 9.5% seems too optimistic.
PUBLIC SECTOR DEVELOPMENT PROGRAMME: Economic and development activities in the country are closely linked with development budget ie Public Sector Development Program (PSDP). Rs 646 billion have been allocated for PSDP for year 2009-10. This amount is 53 % higher than the previous year's PSDP, which indeed should be welcomed. However, it needs to be pointed out that the size of the PSDP alone is not important. Equally or rather more important to note is that how much capital formation will the PSDP result in as well as what will be the life of capital thus created.
While it remains uncertain whether the government will be able to generate the required finances for the whole of PSDP projects, and shortfalls are being projected even in the budget documents, it is also a matter of fact that a major chunk of the PSDP remains non-developmental expenditure.
Much of the spending in on replacement of existing infrastructure and, therefore, does not result in new capital formation. Some 80 percent of the PSDP projects fall in the ongoing category while only 20 percent are new projects. The share of federal ministries and divisions continues to increase, which do not produce any marketable products and services.
There is also a need to improve the classification of the PSDP documents. For instance, expenses related to education can be seen under several different heads. It has also not been clearly stated that how many of the 706 new projects are approved and how many await approval. Interestingly, allocation for Benazir Income Support Fund and the amount for the IDPs have also been included in PSDP which is not the development budget.
SOCIAL SECTOR ALLOCATIONS: It is good to note that allocations for the education and health sector have been increased. But despite these increases, amounts for these two sectors remain very low as a percentage of GDP and fall drastically short of the social needs of the 170 million populace. Importantly, a big portion of the announced increase in allocations goes into the current expenditure of education and health sectors. For instance, the current budget for the Ministry of Education has been increased from Rs 19.1 billion in 2008-09 to Rs 25.2 billion in 2009-10, which shows an increase of 32 percent. On the other hand, the development budget of the Education Division has increased from RS 6.3 billion in 2008-09 to RS 8.1 billion in 2009-10, meaning an increase of 28.6 percent.
The current budget of the Ministry of Health has risen from Rs 4.2 billion in 2008-09 to Rs 4.9 billion in 2009-10, meaning a 16.7 percent increase. On the other hand, the development budget of the Ministry of Health has increased from Rs 19 billion in 2008-09 to Rs 23 billion in 2009-10, which shows an increase of 21 percent. While these increases are encouraging, these are still not adequate in the face of extremely bad shape of our existing public sector education system. Furthermore, the past record shows that the allocations for development projects in the education sector are later on revised downward; and then even the revised allocations are not efficiently and fully utilised.
SOCIAL SAFETY NETS: The government has announced sizeable sums of money, a total of Rs 176 billion direct or indirect, for the welfare of the downtrodden segments of society. These include initiatives such as Benazir Income Support Program (BISP) and allocations for IDPs along with some schemes of microfinance, livestock and dairy development, People's Works Program and SMEs. Allocating BISP and IDPs amounts within PSDP has been mentioned above. However, a germane question is that how useful such programs will really be. Several analysts have been casting doubts and showing their apprehensions over the way the BISP money is being used, particularly the palpable politicisation of the program.
It must be emphasised here that the objective of sustainable social security can be achieved with creation of job opportunities and assisting the people in being able to establish and run respectable livelihoods. Simply giving them some small amounts hardly serves the purpose.
RELIEF: The relief announced for the public sector employees ie 20 % ad-hoc relief allowance in salaries (grade 1 to 16) and 15 % increase in pensions, though welcome, is meager. Importantly, the announcement remains limited to only a select segment of the population. The defence personnel on the front have been given a substantial rise while the remaining have been promised the same from January 01, 2010. However, for majority of the population that does not benefit from these small relief measures, things have been made rather worse by withdrawal of subsidies and proposals such as the carbon tax.
WITHDRAWAL OF SUBSIDIES AND ENERGY PRICES: The government has announced to withdraw the subsidies given on electricity and gas under pressure from lending institutions. While there is already an acute power sector crisis in the country, such a move will increase the power prices further, not only adding to the cost of economic activities but also burdening the domestic consumers further. It is ironic to note that on the other hand, the government did not pass on the benefit of reduction in prices of oil in international market to the domestic consumers and continued to earn huge amount of revenue from petroleum products.
THE DEBT TRAP: PM's advisor on finance bluntly says that if the pledges made by FoDP are not fulfilled, the government may seek further loans from the IMF - as if $50 billion (30.7 % of GDP) is not enough. The servicing of debt and interest on it will consume Rs 722 billion in 2009-10, and in this background, there is sadly no serious effort to put the country on the path of self reliance and effective use of its available resources.
The focus on money easily available in the form of loans is pushing the country into a deep debt trap, as the money comes with rigorous conditionality. IMF has imposed the stringent conditions and a very higher mark up rate with the recent loan given to Pakistan. A research team of Asian Development bank has recently emphasised that for Pakistan, IMF conditions will reduce the capacity to engineer a solution to the economic problems faced by the country. They add that the country is not fully utilising its domestic sources.
NO AUSTERITY MEASURES: In this time of financial hardships, the budget contains no austerity measures from the top that can have a demonstration effect. The expenses of PM secretariat and Presidency have been increased substantially, rather than being rationalised. Expenses for the PM secretariat for 2008-09 were allocated Rs 230 million but have increased by Rs 154 million to Rs 384 million revised estimates. Besides, certain expenses related to the premier and the Presidency has been distributed in various heads and under the expenses of different ministries and organisations. For 2009-10, the allocation is even higher. Extravagant expenses of ministers, parliamentary secretaries and senior bureaucracy also continue.
TAXES AND REVENUES: The revenue are targeted to grow by 15.7 percent during 2009-10, taking the tax to GDP ratio to 9.6 percent. While raising the tax to GDP ratio is an imperative, this should be achieved by taxing all the taxable incomes proportionally. Once again, there seems no effort to make influential and highly rich groups such as big land owners, property tycoons and stock brokers pay their due share of the taxes. Unfair exemptions continue while the targeted increase has been attempted once again with the proposals as carbon tax that will certainly result in burdening the poorer segments more.
THE ISSUE OF TRANSPARENCY: A good sign is that the government did not attempt to use the Finance Bill for a wider scale of amendments. However, there is a noticeable non-transparency in the figures presented. Inclusion of non-developmental expenditures in PSDP, inflation figures cited by the Minister of state for Finance in her budget speech being different from the State Bank of Pakistan, renovation of presidency having been included in the budget of Capital Development Authority are just a few examples.
BUDGET MAKING PROCESS: The whole process of budget making and presentation continues to be run in a hasty and non participatory manner like the past. The budget this year was presented on June 13 leaving very little time for genuine and comprehensive debate and analysis. More important is that there remains very little participation of the stakeholders in preparation of the budget. It has been pointed out time and again that the process of formulating budget proposals should start in the months of February/March and consultation of all the stakeholders should be ensured. This has been overlooked once again. Involvement, rather interference, of IFIs particularly IMF in setting the budget priorities and targets this year was also quite obvious, and indeed a matter of concern.
CONCLUSION The budget, as a whole, seems devoid of any strategy that can put the country back on the track of economic revival and a homogenous and fair growth. Neither is there any serious effort to strengthen the economic foundations of the country, nor is there any meaningful relief for the poor and disadvantaged. Policies of the past continue to be pursued in economy, besides security and foreign relations, which have ruined the country to a great extent. No shift in thinking and paradigm is witnessed, which is must for a tangible positive change.

===================================================================================================

                                       Budget 2009-10 at a glance

===================================================================================================

                                                                                (Rupees in billion)

===================================================================================================

                    Receipts                                          Expenditure

===================================================================================================

(a) Tax Revenue*                           1513.1      (A) CURRENT                           1699.2

(b) Non-Tax Revenue                         513.6      General Public Service                1189.1

Gross Revenue Receipts                     2026.7      Defence Affairs & Services             342.9

Less Provincial Share                       655.2      Public Order Safety Affairs             34.6

I Net Revenue Receipts                     1371.5      Economic Affairs                        84.9

II Net Capital Receipts                     190.5      Environment Protection                   0.4

III External Receipts                       510.4      Housing and Community                    1.5

IV Self-Financing of PSDP by Provinces      173.0      Health Affairs and Services              6.5

V Change in Provincial Cash Balance          72.9      Recreational, Culture Services           3.7

                                                       Education Affairs Service               31.6

VI Privatisation Proceeds                    19.4      Social Protection                        3.9

                                                       (B) DEVELOPMENT                        783.1

                                                       PSDP                                   646.0

VII Bank Borrowing                          144.6      Federal Government                       446

                                                       Provincial Government                  200.0

                                                       Est Operational Shortfall              -20.0

                                                       Other Dev. Expenditure                 157.1

===================================================================================================

TOTAL RESOURCES                            2482.3      TOTAL EXPENDIFURE                     2482.3

===================================================================================================