EDITORIAL: The International Monetary Fund (IMF) in its Fiscal Monitor report titled “Putting a Lid on Public Debt” has projected an increase in government expenditure of 2.1 percent of Gross Domestic Product (GDP) in the current year as opposed to last fiscal year.
However, this projection makes two assumptions that can be challenged. First and foremost, the government budget assumed a GDP growth of 3.6 percent, which was revised downward to between 3 and 3.5 percent, with the IMF projecting a growth of 3.2 percent.
At this point in time there is serious concern that the two major components of growth, notably agriculture and industry, may be unable to meet targets due to IMF conditions agreed by Pakistan’s economic team leaders that are likely to negatively impact on the output of these two major contributors to growth.
The conditions pertaining to pledges relating to the farm sector stipulate that: “while noting the importance of food security, we recognise that the government’s large-scale interventions in markets for agricultural commodities, including fertilizers, are no longer fit for purpose.
They have created distortions stifling private sector activity and innovation, exacerbated price volatility and hoarding, and placed fiscal sustainability at risk.
To enable an agile, productive, diversified, and internationally competitive agricultural sector to the benefit of all Pakistanis, we will refrain from announcing support prices (for raw commodities) and discontinue procurement operations that crowd out the private sector, limiting purchase programmes to that specifically required for the federal government’s own use and a tightly defined food security (with objectives and parameters clearly defined ex ante), with all transactions at market prices and any sales from its stocks will happen at cost recovery.“ Additionally, the cotton crop is lower than target, documented by the Cotton Ginners Association.
With respect to industry, the government has pledged to the Fund to refrain from providing companies fiscal incentives such as tax breaks or other subsidies (including for credit), “and this would include not providing new fiscal incentives to any new or existing Special Economic Zones (SEZs), and will not renew existing ones, as SEZs are meant to be temporary solutions to pre-existing constraints in the business environment. They will also refrain from creating new SEZs or EPZs going forward.”
While a phased approach has been agreed and the strategy for transition arrangements to be finalised by end September, not yet shared publicly, with the SEZs to be fully phased out by 2035 subject to pre-existing contractual obligations; however, during the transition period “the authorities will strive to replace preexisting profit-based incentives (such as tax exemptions) with cost-based incentives (such as immediate expensing on tangible assets), subject to compliance with existing legal commitments.”
The government’s Public Sector Development Programme (PSDP) is a prime engine for growth and as has become the practice, administration after administration overstates its allocation in the budget to claim that it is more committed to public welfare than its predecessors but by the end of the year this allocation is slashed to meet the rise in the deficit from what was budgeted.
Federal PSDP was budgeted at 950 billion rupees last year while the revised estimates indicate that the actual allocation was 659,000 million rupees – nearly a 30.6 percent decline.
Not to be outdone by the budget the Shehbaz Sharif-led government presented last year, his government this year has budgeted an allocation of 1400 million rupees which as per Ahsan Iqbal, the Federal Minister for Planning, Development and Special Initiatives, will have to be slashed by 200 to 400 billion rupees due to the worst-ever economic situation – a statement that he made two months ago.
This newspaper has persistently recommended that the government is required to reduce its current expenditure outlay, which was raised in the budget by 21 percent in spite of the poor economic conditions, which would require voluntary sacrifice of the major recipients, including pension reforms (relating only to the 7 percent of the total labour force that comprises civilian and military employees) that are no longer funded entirely at the taxpayers’ expense.
The need of the hour is to reduce this expenditure item, which would automatically reduce the pressure to raise taxes and to borrow from domestic and international market at a high rate of return (a rate associated with the state of the economy), which simply adds to the current expenditure costs.
Copyright Business Recorder, 2024
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