Jun 152008

Abid Hasan

I would wish to congratulate my friend Naveed Qamar and his team for putting together a budget under very difficult economic circumstances. On the face of it, the numbers add up and there seem to be goodies for all. But a look behind the numbers highlights several areas of concern, perhaps resulting from the rush nature of the budget’s preparation and lack of a coherent economic vision reflecting the constantly shifting coalition politics. These shortcomings can, and must, be addressed in the coming days and weeks during the parliamentary debate.

First, the budget lacks the medium-term economic vision and development strategy that it supports, and how the fiscal and expenditure policies and allocations fit into this vision and strategy. The budget is perhaps the most important policy document, and it was imperative for the growth and poverty reduction strategy to have been included in it. In addition, there is inadequate discussion of the medium-term macroeconomic framework. It is unclear whether the fiscal, monetary and external sector numbers and targets are internally consistent. Also missing is a credible medium-term strategy for lowering the fiscal and current-account deficits to sustainable levels.

Second, a major drawback is the optimism in the budget. On the revenue side, the expected increase in revenues appear very ambitious in the light of the difficult economic conditions in the next 12 to 18 months and of slow growth, while on the expenditure side the untargeted subsidies appear underestimated. Hence, the fiscal deficit, as well as the current-account deficit, is most likely going to end higher, as happened in 2007-08.

Third, there is lack of clarity on the tax strategy. The budget should have clearly articulated that the tax-to-GDP ratio has to increase to 16-17 percent in three to four years. Either that or Pakistan cannot provide its citizens with adequate quality education, healthcare, clean water and basic infrastructure without increasing taxes. Past governments, legislators and the media have been highly irresponsible in harping on “tax-free” budgets when in fact they should have highlighted the need for raising taxes. It is worrisome that the government has not aggressively moved on taxing some of the under-taxed sectors, like stock market and real estate. The proposed tax on real estate is a joke when viewed in the context of the market prices of land and building. It is hoped that this government will show leadership and courage by committing to a credible strategy for achieving the higher tax/GDP goal. The budget should also have highlighted how the proposed and current taxes impact on different segments of society.

Fourth, there are several issues in respect of the proposed expenditure allocations. Most important, there is no commitment or strategy to ensure that taxpayers’ money will be well spent, which is essential to the raising of taxes. Taxpayers need to be assured that the government’s past predatory behaviour–such as using taxpayers’ money imprudently and siphoning off resources for the benefit of its own employees and official–will be changed. A quick review of the allocations conveys a strong impression that the government has continued with the shotgun approach to allocations, rather than their being selectivity based on undertaking a systematic and ruthless exercise to eliminate the high degree of waste that has crept into the current and development expenditures. Both current and development expenditures need to be ruthlessly pruned to free up resources for pro-poor spending.

There are over 1,700 development projects in the PSDP. It is all over the place. In respect of the PSDP, it should focus on a few hundred high-priority and quick-yielding projects that will increase water and energy resources and food-grain production, and improve human-development indicators. The other projects must be deferred by a year or two or dropped all together. Continuing to allocate good money for bad projects is irresponsible use of taxpayers’ money. In addition, the government needs to put in place benchmarks and credible monitoring mechanisms to assure the taxpayers, legislators and policy-makers that money is being wisely spent and that the benefits are being achieved. As we all know, spending money by itself does not lead to expected benefits.

Another important weakness is the inadequate level of funding and scope of the Benazir Bhutto cash subsidy programme. The present allocation is a disappointing 1.5 percent of the budget, for a government that claims it is giving priority to the poor. It appears that the poor are being sacrificed at the altar of fiscal space. On a minimum, at least 10 million households should have been targeted for the next two years, including low-income families, and adequate resources (at least Rs120-130 billion) provided in the budget by pruning the current and PSDP expenditures and reducing untargeted subsidies.

A larger beneficiary pool is critical to avoid an unmanageable backlash when the untargeted oil and electricity subsidies are withdrawn. As done under the livelihood programme for earthquake-affected households, where a clear message was conveyed that cash support is not a lifetime entitlement, the cash subsidy for low-income households could be withdrawn in a year or so, while maintaining the programme for those below the poverty line. Also the proposed NADRA-based scheme is flawed in its ability to identify the poor and will not stand up to best practice examples. It is not clear why the government chose to ignore more simple and less discretionary methods–for example the proxy means-tested and self-selection programme used successfully for the earthquake families or using children in government schools as a starting point.

The proposed public works programme of Rs28 billion, in the name of the poor, could end up being a waste, unless it is truly labour-intensive, and communities and civil society have a major role in its design and implementation. It is strongly recommended to channel this money through the poverty-alleviation fund, the rural support programmes and well-governed NGOs.

The estimates for the untargeted oil and electricity subsidies also appear on the low side. The budget needs to clearly spell out the assumptions and inform people how the subsidy will be brought down, especially considering the prospects of rising oil prices. To the extent Pakistan gets the deferred payment facility from Saudi Arabia, this should be used to shore up reserves, and not wasted by continuing the consumer subsidy. Unless and until the consumers pay import prices, they will consume more and the oil import bill will not go down.

Fifth, the budget is silent on several important elements of the macroeconomic programme and strategy, or does not discuss them adequately. There is limited discussion on strategy in respect of either public-sector borrowing or strategy for financing the huge current account deficit, while at the same time increasing reserves. The budget also does not articulate the government’s privatisation or foreign direct investment strategy.

Conspicuous by their absence in the budget are: (1) any discussion on how the federal and provincial governments will coordinate their fiscal and real sector policies in respect of achieving human development goals whose implementation falls in the domain of provincial governments; (ii) strategies–comprising policy, pricing and institutional reforms and budget allocations–which will enable Pakistan to enhance water and energy resources, increase food-grain production, and make exports the driver of growth. Only allocations are discussed without it being highlighted how the allocations will lead to the desired outcomes.

The budget, as presented, may not fully meet the requirements–in respect of a sound macro-framework and sustainable targets for reduction of twin deficits– necessary to get budgetary support from the international financial institutions, or get the “seal of approval” of the IMF which is useful to enhance financial standing in the international markets. The proposed budget is also unlikely to be seen as credible by the rating agencies as well.

The above shortcoming can be overcome in the coming days and weeks, while the budget is being discussed in Parliament. One way to address these issues is for the government to present to Parliament its detailed strategy and policy statements in regard to the shortcomings and to reprioritise the proposed allocations.

The writer is a former operations advisor of the World Bank. Email: fffhasan @gmail.com

Source: The News, 15/6/2008

 Posted by at 9:03 am

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