Monthly Archives: June 2007
High subsidies, development funds lose worth when economy stands on shaky grounds
By Riaz Missen
Despite the wide spread impression that it is an election year budget due to record allocation for public sector development programs but given the prospects of the economic managers who had authored the fate of the economy packing home, it can be safely called a farewell budget. Subsidies for the poor sections of the society are meaningless when the economy stands on shaky grounds. High inflation, energy crisis, mismanaged water resources and political uncertainties are set to deny their gains in last eight years.
The government has tried to strike a balance between the expectations of the different sections of the society as well as the available resources. In some areas it has set unrealistic goals. In others, it seems having a conservative approach while allocating funds or granting subsidies.
A cursory look at the fund allocation chart will reveal that the budget is as business friendly as in the past. A phenomenal growth in agri sector has been used an excuse to allocate record funds for it.
The priority seems to address the demands of the vocal sections of the society like feudals, traders, financial wizards, and the government employees. The defence allocations have also been increased while keeping in mind the inflationary trends and experience of the last year.
The ‘silent majority’ can best live with the tall promises that have been made in the budget. A deliberate attempt has been made to prove it to be favouring the poor sections of the society, as well. The subsidies in terms of food items are supposed to alleviate the sufferings of the teeming millions in the times of high inflation.
There are some areas where the government has tried to make promises fully knowing that they can’t be fulfilled. Also, there are some avenues of income it has left untouched. There could be some revolutionary measures that it should have taken to alleviate the sufferings of the lower and middle income groups but it has behaved as usual.
The budget 2007-8 with a total outlay of Rs. 1874 billion was presented in the National Assembly on Saturday. The fiscal deficit in the budget will be Rs. 205 billion. The current expenditures in the budget have been set at Rs. 1353 billion i.e. 66% of the total budget, which is 2.2% more than the current fiscal year budget. Rs. 520 billion has been allocated for the annual development program, 37.7 % more than the current year.
Rs. 1394 billion fiscal resources would be available to the government for the next financial year with Rs. 205 billion deficit. In current year 1100 billion rupees were available to the government. The net taxation revenue target in the budget has been set at Rs. 902 billion, which is 28% more than the current fiscal year.
The centre will transfer Rs. 466 billion revenues to the provinces including Rs. 403 billion from the divisible pool and Rs. 62.8 billion through direct grants. Rs. 113 billion has been allocated in the budget for subsidies, while Rs. 119 billion has been earmarked for interest and repayment of foreign loans while Rs. 318 billion for repayment of the domestic loans.
Defense budget has witnessed increase by 10 percent going by the inflationary trends and the experience of the past years.
Agriculture sector seems to be the real beneficiary in terms of budgetary allocations as compared to industry given the heavy presence of the fuedals in the corridors of power. Rests of the sectors of economy have got their privileges intact and where it seems possible the concessions have been granted in terms of relaxation on importing machinery.
Raise in subsidy on fertilizer, concession on tube well charging rates by 25%, allocating funds for the supply of quality seeds and subsidies on diesel have been the major incentives announced for the agri sector.
Constructing infrastructure across the country has been termed the major focus of the PSDP. The government has sought completion of ongoing projects within time. The pace of work on these projects was slowed down due to high inflationary trends in the economy.
Record subsidies have been announced presumably to alleviate the sufferings of these sections of the society. The essential commodities will be made available at subsidised rates (25 %) to the people by expanding the network of utility stores to the Union Council level in four months.
The government employees will get 15% raise in their salaries, the retired ones will get 20% raise in their pensions while the unskilled worker’s minimum salary has been increased from Rs. 4000 to Rs. 4600.
The government intends to construct 250,000 low-cost housing units to provide cheap accommodation facility to the low-income group a housing scheme in collaboration with the provincial and district governments for which the House Building Finance Corporation would provide soft loans. An estimated number of 250,000 units would be constructed in the next five years.
Another scheme for low paid government employees would be launched under which 37,000 housing units would be given to the employees on ownership basis. The government employees would have the facility to get loans for the construction work.
Meanwhile, the government has allocated a sum of Rs1.206 billion for the housing ministry against Rs1.194 billion fund provided to the ministry under the Public Sector Development Programme for the last fiscal year.
Education sector has been allocated 4% of the total budget while health sector has got Rs. 5.24 billion besides Rs. 16 billion for the provision of clean water.
The government has also allocated Rs. 26 billion for the construction of water reservoirs while one billion rupees have been allocated for Thal and Kachhi canal.
Rhetoric vs. reality
The government has made claims vis-à-vis its achievements in terms of improving the micro-economic indicators during last eight years like GDP growth, per capita income, foreign exchange reserves and the revenues. It has also owes the credit of bringing the expenditure on public development programs to the record level besides achieving the 4% target of expenditure on the education sector.
The foreign direct investment has also touched new limits due to the liberalisation policies of the government by which opened all the sectors of economy to the investors. With no limit to earn profit and low interest rates in early years did their wonders in country with 160 million people out of 30 million are supposed to belonging to the middle class.
The benefit of low interest rates went to the banking sector who forwarded credit to the middle class for the purchase of consumer goods. Car leasing companies, motorcycle manufactures did see phenomenal rise in demand. The sale of electronic goods like refrigerator, washing machine, TV etc. also touched new limits. Mobile phone companies also benefited from the credit forwarded by the banking sector to the middle income groups of the society.
Only three sectors out of 32 have been showing worth during last eight years. They include banking, oil & Gas and telecom sectors. The rest have refused to rise up despite heavy restructuring drive. The economic cycle has been run on the money sent back by oversees Pakistanis and the one billion dollar aid package of the Bush Administration.
Reforms that were meant to bring transparency in the working of the public institutions are still under way. A lot of funds for the uplift of the country could not be spent during last fiscal. The departments missing their targets are being asked to spend the pending amount within next two or three months.
“The budget doesn’t deal in an effective way with infrastructural bottlenecks (acute shortages of water and power), speculative activity that is diverting precious resources to non-productive areas (real estate and stocks), provision of social security net and lifting and boosting productivity by investing appropriately in human capital,” concludes a commentator.
Poor on razor’s edge despite heavy subsidies
When the government had started claiming to achieve micro-economic stability, the then Governor State Bank, Dr. Ishrat Hussain, had publicly admitted that the axe of structure reforms had fallen on the poor and middle income groups.
The poor sections of the society were duly promised to be compensated in the next phase of reforms, for the government had brought down interest rates and showed door to many unskilled workers during its restructuring drive.
The second generation reforms have yet to get a momentum while the team of economic managers is set to leave back to where it had come from. What it has given is a casino-culture economy whereby the mafias of the financial sectors have taken the savings of the poor through stock exchanges and real state business.
The well-off sections have never been brought in the tax net for the guiding philosophy of the economic managers was that the more they will save, the more they will invest in the export-oriented business.
Tax-to-GDP ratio stood at 13.5 percent in 1999 that is down now around 9%. During the last eight years inequalities have grown while the ratio of indirect taxes has been increased burdening further the middle and lower income groups.
Amidst political chaos lurking on country’s horizon, energy crisis looming large, inflation rising high, trade deficit increasing every day, cost of business on the rise, the agriculture left on the mercy of the heavens and the middle and lower income groups burdened with heavy taxes, the subsidies will only heat up the economy rather than benefiting the poor.
Economic managers ditch the country
While instituting reforms, the real task would have been reducing the administrative expenditure as well as taking measures to keep prices of essential goods for the consumers. But as the reformers got the momentum monopolies emerged and the government did not cap the profiteering ratio lest the investors are discouraged.
Too, the regional trade was not promoted to lessen the cost of business and making available cheap and quality goods to the people. Rather, this avenue remained hostage to the political expediency to the bad luck of the economy.
The best hope of General Musharraf after his taking over the government in 1999 could have been the restructuring of the economy to bring efficiency in different sectors. Given the onset of the WTO regime that obliged Pakistan to allow free flow of goods from the other members of the regime, the real challenge was to increase the productivity so that the trade deficit does not push to the limit that the country defaults vis-à-vis it foreign liabilities.
While one must not expect the government to be pro-poor in free market economy but it should have protected the consumers against the ruthless profiteering of the business community.
The repercussion of preferring the businesses over the consumers are obvious. While the economy stands predominantly uncompetitive, government can resist allowing foreign products penetrating into the domestic market, no more. The trade deficit is likely to compounding the woes of economy. How country will bridge gap, remains as confounding a question as it was in the unfolding years of the Musharraf regime.
Prospects of political backlash
Take into consideration the scenario in which the Musharraf’s legitimacy is being questioned by the civil society and political parties, it is not difficult to bring the public irritated by the price hike in essential commodities and falling living standards. While mafias in financial sectors, hoarders and monopolists have made people’s life miserable, the government is increasing losing confidence to establish writ of the state.
The persistence of energy crisis and no prospects to tackle the same makes it evidently clear that it will be difficult to keep up the present pace of economic growth while trade deficit is getting unmanageable. Political stakes have been raised too high to let regional trade deliver its benefits in terms of curtailing cost of business and making available to the consumer low priced but quality products.
No drastic cut has been made to curtail administrative expenditure. Defence budget remains as higher while the role of armed forces still needs to be defined as per the requirements of the global age. While the prospects of real growth are dismal, these two avenues have not been utilised to give breathing space to the masses.
Middle East remains as turbulent while Iran is becoming increasingly under threat of US attack on the nuclear program. So what is evident is that the energy prices will not come down raising prospects that GDP growth target will keep on falling. The first effect will come out in the form of taking back the subsidies made now available to the poor sections and agriculturalists.
In the presence of the less-democratic political parties and their well-known opportunist outlook, one may not expect the passion will not rise among the masses. Even a little provocation can compound the difficult situation the General-president is in right now.
Last but not the least, once the macro-economic indicators start deteriorating the government, no matter who is in command, will not even in the position to grant concession to pacify people’s passions. Will the well-off sections come to the rescue of the government? The answer is that simple: they will not. The best time to construct barriers against anarchy was 2004-5 but this opportunity was lost. The interesting aspect of the game plan of Musharraf’s economic managers is that there will be left none virtually none to expect responsibility if Musharraf too decides to quit, through a deal or otherwise.