Fiscal reform: In the battle against subsidies, government gives in

Finance minister bows to lobbyist pressure, but lashes out in his speech to parliament.

ISLAMABAD:

After having spent months making the case against untargeted subsidies as being unaffordable, the government appears to have given in to pressure to retain subsidies on wheat and fertiliser for the upcoming fiscal year.

Finance Minister Abdul Hafeez Shaikh made the announcement in his speech to the National Assembly that marked the formal end of the budget debate in parliament. “All the subsidies benefiting the masses, [primarily on] fertiliser and wheat procurement, are retained in the budget,” he said.

The minister’s statement appears to be in sharp contrast to his earlier statements against untargeted subsidies and violates the government’s commitments made to the International Monetary Fund (IMF) last month to rein in spending on subsidies for the fiscal year ending June 30, 2012.

The government spent Rs395 billion on subsidies in the outgoing year and had initially planned to limit that spending to Rs166 billion for 2012. That amount seems likely to go up substantially now.

Parliamentarians from rural constituencies, most of whom own large tracts of agricultural land themselves, have been pressing the government hard against levying taxes on agricultural inputs (fertilisers, pesticides, tractors, etc) or withdrawing subsidies. After the finance minister’s speech on Friday, they appear to have won half the battle.

Even though finance ministry officials tried to put a brave face in making the announcement, Shaikh appeared visibly perturbed by having been forced into retreating on his earlier promises, and spoke out – in his usual, polite and measured tone – against the legislative pressure that he had faced.

“The parliamentarians have the biggest responsibility of paying taxes, primarily this parliament, as the government cannot ask common man to sacrifice until the politicians’ hands are clean,” he said.

Perhaps the biggest retreat is on the fertiliser subsidy, for which the government had allocated precisely zero rupees in its initial budget proposal. Finance Secretary Waqar Masood claimed that the government had initially not planned on importing fertiliser but had since backtracked on that decision and therefore needed to allocate funds for subsidising fertilisers.

The government has allocated Rs4 billion in wheat subsidies relating to maintaining reserved stock of 2.5 million metric tons.

The government may now also extend research and development support to textile sector on which it had planned to spend nothing in 2012, compared to the Rs7.5 billion in 2011.

The budget documents show that the government had planned to save Rs4 billion by ending the subsidy on wheat imports through the Trading Corporation of Pakistan, Rs800 million by ending the subsidy on phosphate-based fertiliser manufacturers, and another Rs200 million by eliminating the subsidy on importing such fertilisers.

Shaikh said that, in the outgoing financial year, the budget deficit would remain at 5.3% of the total size of the economy, excluding 0.6% in power sector arrears. This number is 0.2% higher than what he announced on June 3 in his budget speech. The total official admitted budget deficit would now be 5.9% or Rs1,068 billion.

The Finance Minister also announced to incorporate 20 of the 66 recommendations made by the Senate about the budget. The upper house of Parliament is not authorised to vote on the budget but can make recommendations for the National Assembly’s consideration.







Published in The Express Tribune, June 18th, 2011.