A timid budget by a hesitant govt

The budget was really not a budget per se. We have come to expect major policy measures being enacted, loads of fresh taxes for the law-abiding and goodies for the supporters.

There were dire warnings that the corporate sector, the only one paying taxes religiously, will get clobbered by fresh taxation. They have largely escaped, except for the inexplicable tax on bonus shares.

Normally, bonus shares are doled out to shareholders in lieu of dividends so that the company can re-invest its profits. What is the Finance Minister saying? Don’t save, just spend? A strange advice for a developing country!**

The government is hemmed in by its political foes, the dire economic situation and powerful lobbies so badly, that it is quite understandably frightened of doing anything in case it backfires.

Mercifully, the major job required to correct the external account imbalance has already been done. The rupee has been devalued so much that in my opinion it is already under-valued. It is poetic justice that this was done in the reign of the very same finance minister who kept it overvalued for years.

The consequences of that over-valuation were rampant imports and stagnant exports.

Now the job of the government is to hold the ship of the state steady. Just try to govern well and correct the misdeeds of the past. If the gross mis-declaration at Karachi port is reduced and the borders duly guarded against smuggling in and out of the country the economic forces will run their own magic.

Wherever market forces are allowed to work the people of Pakistan respond rationally and work hard to improve their own livelihoods.

Imports will go on falling and exports will pick up again. The gross mis-declaration and smuggling badly erode the effect of the economic measures already taken. These two factors also deprive the state of valuable import duties and sales tax.

Much of our nascent industry has been destroyed by Chinese and other imports. This destruction was aided by an overvalued rupee, and the mis-declaration of import values, and rampant smuggling. Hordes of small factories making electric appliances, toys, household goods, sanitary wares and what have you, were routed by the larger, better organized, foreign, largely Chinese, manufacturers.

The “infant industry” of Pakistan was asphyxiated by its own government under the guise of “free trade.”

Our small and medium scale industry, known as SMEs in economic jargon, never had the chance of growing into full-scale factories and businesses.

Any economist will tell you that infant industries must be protected in their childhood so that they can withstand the full blast of international competition later. India did this rigorously so now they have industries which can withstand multi- national giants. Tata versus Toyota is an even match. Pakistan’s cycle industry never got off the ground.

The steel mill was still-born, BECO was nationalized and destroyed, and so on and on. It’s not that we as a nation are incapable of building our economy, we have the ability to do so. There are prominent examples where people have withstood all odds to build institutions.

Witness the success of Millat Tractors in engineering. The textile, sports goods, surgical instruments, leather tanning industry have developed into a world competitive industries despite being hobbled by unnecessary restrictions and lack of infrastructure, and a complete absence of educational and vocational inputs.

One measure of this budget, that of changing the definition of an SME from a company with an annual turnover of 400 million rupees to 800 million, will go a long way in rebalancing the scales, if properly followed up. The national credit policy should now allocate funds for the development of the SME sector just as it does for agriculture. The large-scale industry which is well established is always a better bet for any bank to loan too. The small factories cannot present smart feasibility reports, and do not have a depth of credit history.

When we started off as a country this was precisely why large development banks such as PICIC, IDBP, NDFC, etc., were set up in the public sector. The fate of these is similar to all our other public-sector institutions. Nevertheless, the State Bank of Pakistan can effectively direct banks to give priority to SMEs.

The huge allocations for the TERF (temporary economic refinance facility) loans were entirely gobbled up by the “Big Boys” who are now flush with money they borrowed at 3% or even lower.

There are obvious solutions staring us in the face. Trim the government back down to less than 20 ministries if not a dozen. Trim the bureaucracy, trim the army budget, sell off the loss-making public-sector enterprises (white elephants). These are difficult jobs but someone has to start. The one who does may just find that the public will respond and appreciate genuine reform.

All these reforms do not wait for budgets; they require a government with the will and a sense of purpose.

Copyright Business Recorder, 2023