Rational over-optimism?

Federal Finance Minister Ishaq Dar in his budget speech 2015-16 maintained that the first budget he presented was focused on saving the country from default, the second budget to achieve macroeconomic stability and the third budget would be focused on growth and poverty reduction.
Saving from default was achieved by tripling reliance on external loans from 243.4 billion rupees in the revised estimates for 2012-13, the last year of the tenure of the PPP led coalition government, to 727.5 billion rupees in 2015-16 budget. This figure includes 3 billion Eurobonds and sukuk (identified as other aid in budget documents) that have a rate of interest, or mark-up as preferred by Dar, of well above the international market. And in this context it is relevant to note that Dar intends to issue another 1 billion dollar euro bonds (at rates of interest that one would hope are lower than those previously set). China safe deposits budgeted at 99 billion rupees with revised estimates of 50 billion rupees did not deter Dar to budget 101 billion rupees for next year. Domestic borrowing from scheduled banks rose from 175 billion rupees in 2013-14 to 579.7 billion rupees this year - an enhanced reliance that was necessitated by the insistence of the International Monetary Fund (IMF) to desist from borrowing from the State Bank of Pakistan (SBP) which registered a negative 532.4 billion rupees. Borrowing from the SBP is an inflationary policy while borrowing from the scheduled banks is anti-growth as it simply crowds out private sector borrowing. Tails you lose Mr Dar and heads the economy loses.
The budget of year 2 in power achieved macroeconomic stability Dar claimed and cited improved credit rating by foreign credit agencies as proof of his contention and ignored the fact that the improved rating was premised on 12 billion dollar foreign exchange reserves held by the SBP which include foreign borrowing. Dar also cited Japan External Trade Organisation (JETRO) which declared Pakistan as likely to be second choicest place for foreign direct investment though he was silent on a steady decline in actual FDI since the PML-N government came to power.
Dar's stated objective for 2015-16 is growth and poverty reduction and the question is whether he can achieve this target based on the budget documents? I will not focus on the integrity of his data for the outgoing fiscal year or comment on whether the targets set for next year are too ambitious; instead I would focus on whether the stated objectives can be achieved premised on the expenditure and revenue generation envisaged in the budget documents? The pro growth budget presupposes a rate of growth that is 5.5 percent for next year and Dar intends to achieve this through (i) higher public sector development programme (PSDP) - from the budgeted 525 billion rupees this year with revised estimates of 542 billion rupees, due to the 45 billion rupees for special development programme for temporarily displaced persons (TDPs), to 700 billion rupees for next year, (ii) a massive reduction in domestic debt servicing - from 1224.5 billion rupees budgeted last year to the revised estimates of 1169 billion rupees projected to decline further to 1168.6 billion rupees next year; and (iii) taxation and mark up concessions to exporters and industry.
PSDP is to rise based on a 100 billion rupee rise in allocation for TDPs - an expenditure that may or may not be translated into physical asset building and therefore an item that should have been included in current expenditure. The Prime Minister's Youth Programme is allocated 20 billion rupees in 2015-16 but given that this programme includes distribution of free laptops, fee reimbursement scheme for less developed areas, and youth training schemes, it is unclear how much of this amount would actually generate some form of economic activity and thereby fuel growth. The focus of the government on water and power is reflected by a decline from the 46 billion rupee revised estimates of the current year to 30 billion rupees next year, for Wapda a rise from 49 billion rupees this year (though 63.6 billion rupees were budgeted) to 112 billion rupees in 2015-16 (given the scale of the energy crisis this amount is considered paltry) and 159.6 billion rupees for the Prime Minister's pet road projects with an allocation of 159.6 billion rupees in 2015-16 compared to 109 billion rupees in the revised estimates of this year.
Dar allocated 28.5 billion rupees for special federal development projects though given that in 2014-15 he had budgeted 36 billion rupees under this head and disbursed less than one-third of this amount or around 10 billion rupees this allocation too may not be forthcoming.
The massive reduction in domestic borrowing mark-up is, as per the Finance Minister's speech, due to retiring domestic debt from the proceeds of the Eurobonds and sukuk. Given that these form part of the SBP's reserves it is unclear whether the retirement is simply on paper. Besides the amount budgeted for debt retirement is a variable that changes as the need of the government to borrow changes as well as its access to foreign borrowing.
And finally, Dar focused on taxation measures and once again cited lowest mark-up in recent history as a measure that is pro growth. The corporate tax rate was reduced by one percent; however, the threshold of adjustable advance income tax collected at a rate of 7.5 percent on domestic electricity bills above 100,000 rupees was lowered to 75,000 rupees. Exporters would be able to access cheaper credit, and Exim bank would become operational this year; but Dar claimed that the applicable rates on export oriented sectors which were 2, 3 and 5 percent, below the 17 percent standard rate of sales tax, are being misused and to curb this practice he announced an enhancement of rates to 3, 3 and 5 percent. And announced refunds due to the export oriented sectors relating to tax periods till 31st May, 2015 will be issued by 31st August, 2015 - a good measure indeed but Dar should have heeded the comment by the Planning Commission that was presented to the APCC and I quote: "the SBP decision to ease monetary policy has not significantly impacted the investment climate suggesting that the problem lies elsewhere." An overvalued rupee is one such problem and the borrowing history of the PML-N government is another. And of course there is the continued energy shortfall that has not abated.
The budget 2015-16 envisages an increase in the rate of tax in the case of non-filers of contractors by percent, suppliers by 2 percent and in case of commission agents by 3 percent. The rate of tax on non-filer transporters is also proposed to be enhanced by various percentages and the rates in the case of non-residents may also be revised accordingly, to provide a level playing field. It is unclear whether this increase in the applicable rate would generate higher revenue or whether the non-filers would opt to go for all deals in cash. The reforms in the tax system identified by economists as well as by the Tax Reform Commission itself remains stalled for another year with Dar merely stating in the budget speech that its final recommendations are expected this year. Higher revenue instead of reforms remains the focus of the 2015-16 budget which would be mainly generated through higher sales taxes whose incidence on the poor is greater than on the rich. The Minister claimed that 100,000 people had been added as new tax payers but at this rate to bring 3 million taxpayers that were identified by Nadra as possible payers into the tax net would take more than 30 years.
Poverty reduction would be tackled through increasing allocation for Benazir Income Support Programme to 102 billion rupees - from the revised estimates of 91.7 billion rupees this year. A good programme for which Ishaq Dar claims credit every year in spite of the name yet he should recall that it did not win the PPP the 2013 elections as was erroneously argued by the PPP at the time.
To conclude, given the measures announced in the budget 2015-16 and those that are expected to be adjusted during the year as and when the need arises for the Ministry of Finance the growth rate would be the first casualty especially given an over-ambitious 4.3 percent deficit and a growth of 5.5 percent. If growth is to be led entirely by the Chinese investment then the only visible allocation in the budget 2015-16 was outlay for security for Chinese nationals. An allocation of 10 billion rupees was identified for technical study on Islamabad-Dera Ismail Khan route under the China-Pakistan Economic Corridor (CPEC) but actual allocation was left open ended with Dar stating "the government is determined to fulfil the necessary financial requirements of CPEC projects." What these requirements are were not shared with parliament.