ISLAMABAD: The Federal Budget 2013-14 prepared by the Finance Ministry has acknowledged government's total failure on all economic fronts, including meeting budgetary targets, violation of Fiscal Responsibility and Debt Limitations Act, 2005 and short-term risks to the sustainability of foreign exchange reserves.
According to official documents, the budget for the next fiscal year has projected a growth in Gross Domestic Product (GDP) at 4.5 percent, inflation at 9 percent and fiscal deficit at 5.8 percent of GDP with provincial surplus of Rs 70 billion. The State Bank of Pakistan's forex reserves in 2013-14 are estimated at $5.2 billion against $8.1 billion at the time of budget announcement.
The government will earmark Rs 627 billion for defence showing an increase of 15 percent against Rs 545 billion allocated in federal budget and 10 percent raise against revised budget of Rs 570 billion. The government will allocate Rs 1.149 billion for interest payment in 2013-14 against Rs 1.028 billion earmarked for 2012-13. Allocation for pension will be increased by 10 percent from Rs 141 billion in 2012-13 to Rs 155 billion in 2013-14. The amount to be allocated for federal government service delivery will be increased by 6.10 percent to Rs 278 billion from Rs 262 billion.
The document further discloses that the amount for subsidies will be increased by 53.6 percent to Rs 364 billion in 2013-14 against Rs 237 billion earmarked for 2012-13 which witnessed an increase of 5.5 percent in revised estimate giving a total of Rs 345 billion.
Federal government will slash grant to provinces by 5.26 per cent to Rs 54 billion from Rs 57 billion earmarked in budget and negative 6.9 percent against revised estimates of Rs 58 billion. Grant to other than provinces will be increased by 2.9 percent to Rs 393 billion in 2013-14 from Rs 383 billion in 2012-13 and 3.1 percent, ie, Rs 381 billion in revised estimates.
Allocation for Public Sector Development Plan (PSDP) will be increased by 25 percent to Rs 450 billion in 2013-14 against Rs 382 billion in 2012-13. The amount for net lending will be slashed by 51 percent from Rs 51 billion in 2012-13 to Rs 25 billion in 2013-14.
The estimated total revenue (tax and non-tax) in 2013-14 will be Rs 2.833 trillion and FBR's target would be Rs 2.675 trillion. The projected amount for non-tax revenue has been estimated at Rs 689 billion. Gross revenue will be Rs 3.522 trillion. Federal government will transfer Rs 1.628 trillion to provinces under the NFC Award after which net revenue available to the federal government is estimated to be Rs 1.894 trillion.
The Finance Ministry argues that the country's economic situation remains fragile and needs further policy actions over the short and medium-term. Since FY2007-08, an average of 3 percent of growth rate has been achieved, which is less than the growth rate of around 6 percent - 8 percent required to absorb growing labour population. However, attaining positive growth rate despite floods, security situation, energy constraints and international recession demonstrates resilience of the economy.
The documents further reveal the Finance Ministry as saying that the fundamental short-term risk is sustainability of foreign exchange reserves, which stand at $13 billion as on 15 February (including around $8.1 billion with the State Bank of Pakistan). To stabilise foreign reserves, three important short-term measures are required: i) auction of 3G spectrum licenses - which is likely to generate around $850 million, ii) negotiations with Etisalat for the realisation of privatisation proceeds of $800 million, and iii) floatation of Eurobond of around $500 million.
Over the medium term, the following four key recommendations are made: (i) implementation of the new framework for growth - the key initiatives in the growth strategy include encouragement of competition, fostering productivity and innovation, improving efficiency of the public sector, focusing on cities as engine of growth and deepening openness. The growth strategy needs to be implemented by developing and pursuing a concrete policy framework on each of its components; (ii) improvement in energy supplies - a roadmap is required for the resolution of circular debt, structural adjustments in energy sector and fast track completion of energy related projects; (iii) addressing balance of payment difficulties, the recommendation is to increase exports by 3 percent - 4 percent each year, remittances by 7 percent each year, Foreign Direct Investment by over $5 billion over the medium-term and exploration of alleviative external financing mechanisms; and (iv) reduction of budget deficit- policy should be pursued for fiscal consolidation of around 0.7 percent each year over the next three years with an aim to reduce the fiscal deficit to around 4.4 percent of GDP by the year 2015-16. In addition, a roadmap may be developed to improve management of national finances.
The budget deficit for the current year is likely to be around 6.5 percent as against 4.7 percent envisaged during the budget. The budgeted fiscal deficit is likely to increase primarily due to: (i) shortfall in estimated FBR tax revenue by Rs 188 billion, ii) non-realisation of fee from the Auction of 3G licenses amount to Rs 79 billion. iii) increase in domestic interest liability due to higher fiscal deficit by around Rs 100 billion; iv) increase in subsidy on electricity by Rs 108 billion due to non increase in electricity tariff and v) increase in defence expenditure by Rs 30 billion due to increase in pays as a result of announcement by the Cabinet at the time of budget 2012-13 and vi) reduction of anticipated surplus from provinces by Rs 30 billion.
Finance Ministry believes that based on the fiscal deficit of 6.5 percent of GDP, the debt to GDP ratio is likely to cross the limit of below 60 percent prescribed in the Fiscal Responsibility and Debt Limitations Act, 2005 by 30 June, 2013. However, to contain this ratio below 60 percent, it is important to lay a path of fiscal consolidation of at least 0.7 percent of GDP each year. The aim is to achieve fiscal deficit target of 4.5 percent by the year 2015-16.
To achieve this aim the following key recommendations are made: (i) Increase in taxation by 0.5 percent of GDP- key initiatives include; review of exemptions/zero rating regime, implementation of risk management system, tax registration enforcement initiatives, 2012 and Investment Tax Scheme, 2012, monitoring and reforms in Withholding tax system, tariff reforms aiming at simplification and elimination of exemptions and concessions, and roll out of customs automated clearance system; (ii) adoption of a roadmap of targeting subsidies to the poor and needy and removing subsidies for the high-income consumers of electricity, wheat and fertiliser. In this regard, the recommendation is to prepare a consensus driven roadmap for the medium-term; (iii) deepening of austerity measures- continuation of ban on new recruitment and purchase of durable goods (due to surplus durable goods from devolved Ministries), and rationalisation of fuel entitlement, travelling allowance and expenditure on stationery and newspaper periodicals. In addition, identification of areas of savings and reallocation to high priority areas both in the recurrent and development budgets is required; and (iv) continuous engagement with the Provincial Governments for increasing provincial taxation and discussions on provincial savings.
Finance Ministry has recommended that a subcommittee of Cabinet on 'Fiscal Deficit Monitoring' be constituted with key economic ministers to be chaired by the Finance Minister on quarterly basis. The committee may review fiscal developments, approve supplementary budgets, recommend tightening of fiscal rules and present its findings to the Prime Minister, Council of Common Interests and the National Economic Council on a regular basis.