The government must create fiscal space for increasing development spending to generate demand in the economy and get out of low growth phenomena in the country, said former Advisor to Prime Minister on finance Dr Hafeez Pasha.
Speaking as a guest in 'Paisa Bolta Hai' with Anjum Ibrahim, he said that the government has imposed new taxes to meet the revenue shortfall of the first quarter as pre-tranche condition of the International Monetary Fund (IMF).
He said that increase in regulatory duty on luxury items would not give much revenue - the bulk of the 40 billion revenue would be generate from the one percent increase in customs duty across the board. The PML-N government introduced a new concept of minimum custom duty of one per cent in the budget 2014-15, which was subsequently increased to 2 per cent in the current year's budget which now has been raised to 3 per cent, which would generate an additional Rs 21 billion for the government.
The increase in taxes on petrol is astonishing and for the first time any government imposed 8 per cent duty on furnace oil with 47.5 per cent tax on HSD, which is a major fuel for the transport sector and increase in its cost would ultimately negatively impact on the common man. The government would mobilise a major portion of its new revenue measures from taxing petroleum products which would affect everyone.
Hafeez Pasha added that present government has used IMF programme as an umbrella to qualify for funding from other sources as the Fund programme gives confidence to donors in terms of lending to Pakistan. The government would not have been able to launch Eurobonds and other instruments in the international market if it was not in the programme, he added.
Pasha warned that the real problem would start after 2016 when Paris club rescheduling would expire, the repayment to the IMF of $6.64 billion under the Extended Fund Facility would commence, as well as the 5 year Eurobonds would mature. He said that exports have declined by 11 per cent during the last four months as demand factors are not operating in the economy. Exports have been negative in European countries excepting Germany and the country failed to benefit from GSP plus status granted by EU. He added that exports have also been impacted because of power factor.
Pasha said that because of low demand investment has dried up and consequently there is low growth. He said that growth in manufacturing sector is almost negative. He suggested to the government to create some fiscal space and enhance development spending to get out of the low growth phenomena and regretted that on insistence of IMF, the government has already reduced development budget by 25 per cent in the current year. The government has failed to limit current expenditure with an increase of Rs 25 billion non-salary expenditure and nothing has been done to reduce Prime Minister House expenses by 40 per cent as announced by Finance Minister.
Pasha also challenged Finance Minister Ishaq Dar's claim that new taxes were imposed to finance the IDP rehabilitation and Zarb-e-operation and stated that Rs 100 billion for IDP as well as funds for Zarb-i-Azb were allocated in the budget for the current fiscal year. Additionally, he stated that releases of funds for defence budget were less during the first quarter.
The real challenge is what the government would do after the programme when repayments of loans on various accounts are due. Hafeez Pasha stated that in his opinion, the government would not go on another programme and instead may like to stimulate the economy in the remaining period of its tenure for the purpose of next elections. From next fiscal year, the government would take up populist initiatives like Benzir Income Support Programme (BISP), health insurance and a number of other programmes announced by the Prime Minister to create demand in the economy.
Pasha said there is no likelihood of government taking another IMF programme from September 2016 till 2017 because by then the government would be in election mode. Hafeez Pasha stated oil prices decline has provided the cushion to the government in terms of foreign exchange reserves at least for one year by reducing our import bill by $4 billion benefit so far.