Social Policy and Development Centre (SPDC), a policy research think tank has refuted a number of official claims about the outgoing year as well as some of the projections for the next year. The most significant of its estimates is with regard to the GDP growth rate in 2015-16 which it believes is likely to be 3.1% and not 4.7 percent as reported by the Pakistan Bureau of Statistics (PBS). According to the SPDC estimates, the growth rate in 2015-16 has been overstated in ten out of the eighteen sectors in the national economy. Almost 60% of the overstatement is in the services sector.
The alternative estimated growth rate for agriculture is negative 2%; for industry, 5.5% and for services, 4.1%, implying a GDP growth rate in 2015-16 of 3.1%1. This is consistent with the findings of over the last four decades that in a year when the agricultural sector declines, the GDP growth rate never exceeds 4%. Agriculture is important for Pakistan not only because it accounts directly for 21% of the GDP but also 60% of the manufacturing is agro-based and over 40% of trading and transport is of agricultural products.
It may be that electricity generation increased by only 2%. This is unlikely to support a relatively high GDP growth rate. There appears to be an inconsistency: the growth in construction sector is reported at over 13% but the growth in investment in housing in only 4%. The net flow of foreign direct investment (FDI) remained at only $1 billion during first 10 months of 2015-15 against a target of $3.3 billion. Major sectors attracting FDI include power, oil and gas exploration and telecommunications. China has been the main contributor of FDI during this period with a share of 54% as compared to 23% last year. A rise in foreign exchange reserves since June 2013 is due primarily to external borrowing.
Net foreign exchange reserves of the State Bank of Pakistan (SBP) have increased from $6,008 million on June 30, 2013 to $16,808 million on May 27, 2016, showing an increase of $10,800 million. During the same period, cumulative net external borrowing is $11,102 million. The break-up is of multilateral/bilateral assistance ($5,310 million), Euro/Ijara Sukuk Bond flotation ($2,908 million) and the IMF's Extended Fund Facility ($2884 million). Therefore, reserves have increased entirely due to external borrowing. In fact, $302 million have been used to finance the consumption of imported goods and services. There are serious concerns about future external debt sustainability. There is a risk of depletion of foreign exchange reserves by almost 54% in the next two years. The budget estimates for repayment of foreign loans and interest payment are about $6.6 billion in 2016-17.
Gross external inflow of borrowing and grants is estimated to be about $6 billion. Along with FDI, total inflows may reach $7.5 billion. This implies a shortfall of $4.5 billion, which will have to be financed through the existing foreign exchange reserves. As such, foreign exchange reserves face the risk of depletion of 27% next year and up to 54% in the next two years.
The federal non-tax revenues have collapsed from Rs 592 billion during the first nine months of 2014-15 to Rs 445 billion during the same period of 2015-16, implying a decline of Rs 147 billion. The fall is due to a Rs 74 billion reduction in the inflows from Coalition Support Fund (CSF), Rs 45 billion due to lower profits of SBP because of a decline in mark-up rates, and the remaining Rs 27 billion from other sources. The consequence is that despite the fast growth in federal tax revenues of almost 20%, overall revenues of the federal government have increased by only 10%. Next year, the shortfall in CSF inflows could be as much as Rs 150 billion.
Over 18 percent increase in tax revenues of FBR reflects success in mobilization of revenues, but is due mostly to an increase in indirect taxes, especially in the energy sector. Tax revenue collected by FBR shows a high growth of over 18% during the first nine months of 2015-16, facilitated mostly by the enhancement of tax rates and holding back of refunds. However, this increase is largely on account of growth in indirect taxes that constitute 62% of FBR taxes. While direct taxes grew at a rate of 13%, the indirect taxes went up by 22% during this period. It is important to note that the energy sector contributed almost 50% to the total revenue from indirect taxes. In particular, this has contributed to a loss of export competitiveness. Withholding tax on all banking transactions by non-filers has led to a big decline in the increase in bank deposits and a big rise in currency in circulation.
The budget deficit is equal to the total borrowings, domestic and external. Domestic borrowing is derived as the change in domestic debt. During the period, July 2015 to March 2016, Ministry of Finance reports the increase in domestic debt of Rs 1,007 billion. As opposed to this, SBP estimates the rise in domestic debt at Rs 1,209 billion. Therefore, the Ministry has understated the deficit of the federal government by over Rs 200 billion.
As such, the federal deficit has reached 4.8% of the GDP by March 2016. During the last quarter of a year during the last five years, average deficit is almost 2% of the GDP. Consequently, the federal deficit may exceed 6.5% of the GDP by end June 2016, somewhat above the level of last year.
The estimates given in Economic Survey 2015-16 indicate that poverty has fallen drastically from 44% in 2007-08 to 29.5% in 2013-14. However, performance of several indicators that affect poverty incidence does not support this claim. These include deterioration in housing conditions, an increase in unemployment, a fall in real wages, a relative increase in food prices, and a decline in food consumption leading to higher levels of malnutrition.
For instance, the proportion of housing units with one room increased from 23% to 26% and further soared to 28% in 2014-15, reflecting deterioration in housing somewhat above the level of last year.
The estimates given in Economic Survey 2015-16 indicate that poverty has fallen drastically from 44% in 2007-08 to 29.5% in 2013-14. However, performance of several indicators that affect poverty incidence does not support this claim. These include deterioration in housing conditions, an increase in unemployment, a fall in real wages, a relative increase in food prices, and a decline in food consumption leading to higher levels of malnutrition.
For instance, the proportion of housing units with one room increased from 23% to 26% and further soared to 28% in 2014-15, reflecting deterioration in housing conditions. Also, the proportion of housing units with piped water facility declined from 31% 2008-09 to 30% in 2012-13 and to 27% in 2014-15. Further, during 2011-12 to 2013-14, growth in housing rents was 26% against 17% growth in the overall CPI. This indicates that housing rents in this period increased in real terms.
Food inflation during 2007-08 and 2012-13 and during 2013-14 and 2015-16 remained higher than overall inflation. This gap increased substantially during 2014-16 with food inflation at 14%, and overall CPI at 7%.
Another worrisome indicator is that per capita consumption of some important basic food items by the population in two lower quintiles has declined. Between 2007-08 and 2013-14, per capita consumption of atta and milk has fallen.
According to Pakistan Labour Force Survey, the unemployment rate increased from 5.2% in 2007-08 to 6.2% in 2012-13 and then declined to 5.9% in 2014-15. However, after incorporating the effect of 'discouraged workers', the estimated unemployment rate increases to 10% currently.
Some independent economic experts also refuse to believe the official figure being quoted as the expenditure on Public Sector Development Programme (PSDP) during the out-going year. And if the estimates of these experts are taken as factual then the actual amount spent on the PSDP in the outgoing year would perhaps be no more than R. 1.1 trillion. And if so, the size of the next PSDP at Rs 1675 billion would appear to have been increased by almost 50 percent compared to its actual size in 2016-17. Achieving such an ambitious increase in the size of the next year's PSDP would be next to impossible in view of the resource constraints too glaring to ignore.
These economists further believe that revenues for the next year too seemed to have been over-budgeted by Rs 500 billion and, in their opinion, almost about 10 percent of expenditure does not seem to have been budgeted as per the Finance Bill for the incoming year. Even the decrease in the fertiliser prices seemed not to have been budgeted.
And in their opinion the zero-rated regime announced in the budget for five main sectors - textile, leather, sports goods, surgical goods and carpets - was in fact an attempt by the government to avoid its liability of refunding while at the same time increasing the liability of the exporters to the tune of 30-50 percent because the zero-rating would apply to only 10 percent of the inputs.
We as a nation have been taking economy rather too non-seriously now for decades. In fact we shun debating the subject in public as much as possible. Even the debate in parliament on the budget remains mostly pedestrian. Most parliamentarians use the opportunity to talk about their respective constituencies and mostly lament non-release of their quota of the so-called development funds in time. Most do not even unpack the bundle of budget books placed on their desks on the day of the announcement of the budget. Some would even use the occasion to score political points against their rival political parties. Since most do not have the capacity to decipher the finance bill, they would talk about almost everything under the sun except the budget but at the same time try their worst to ensure that their 'sensational' pronouncements in their speeches would be discussed in the talk-shows that evening in all seriousness.
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