The writer is distinguished professor of economics at Beaconhouse National University in Lahore
The challenge of the budget design is to balance the objective of stimulating growth with the apparently conflicting objective of bringing the budget deficit under control. How can this balance on the knife edge be achieved? The answer lies in a drastic reduction in non-productive expenditure and a sharp increase in development expenditure. At the same time, a range of measures need to be initiated for increasing revenues, including widening the sales tax base, removing exemptions and increasing direct tax revenue, not through squeezing the existing taxpayers but by bringing more taxpayers into the tax net. At the same time, if GDP growth can be accelerated, tax revenues will increase and thereby, the budget deficit reduced. Thus, unlike the IMF approach of reducing the budget deficit through economic contraction, the same objective of fiscal stabilisation can be achieved through growth.
Let us indicate the main features of a budget design based on the principle of stabilisation with growth. Stimulating growth requires increasing development expenditure from the present abysmal low of less than two per cent of GDP to the historical trend level of seven per cent. Furthermore, the development expenditure would need to focus on projects that generate employment and have large secondary multiplier effects that induce private sector investment.
The projects that meet these strategic criteria include infrastructure projects, such as power generation, as well as roads and railways that link Pakistan with Central Asia on the one hand and South Asia on the other. Regional economic integration to the north and east of Pakistan can reap rich benefits for the people of Pakistan. Apart from this, programmes need to be launched to improve irrigation efficiencies. These should aim to not only bring more water to the farmers but enable its efficient utilisation to maximise GDP per unit of water use. To enable the increasingly young labour force to contribute to productivity increase and economic growth, skill training programmes need to be launched, the coverage and quality of school education increased, research-based teaching developed in the higher education sector and the coverage and quality of health care improved.
If the fiscal space for such development expenditures is to be created, four policy initiatives are required: first, the Rs400 billion being currently spent by the government annually to finance the losses of public-sector entities can be saved by restructuring and privatising them. Second, the Rs450 billion currently locked up in government commodity trading can be largely saved by leaving commodity trading to the private sector. However, the government needs to build strategic reserves of wheat to deal with unforeseen production shortfalls. Third, across the board subsidies and arbitrary SROs that distort the private sector incentive structure should be withdrawn. This will save hundreds of billions of rupees and also induce economic efficiency. Crucial subsidies on food and electrical power should be targeted to the intended beneficiaries rather then spread across the entire population.
In designing the budget, due consideration should be given to the existing precarious balance of payments situation. State Bank of Pakistan (SBP) reserves are down to about seven billion dollars, which covers only 1.5 months of imports. Actually, three months import coverage is considered safe. It also means that ceteris paribus, Pakistan will not be able to make the payment of five billion dollars to the IMF that is due over the next year. This loan repayment will have to be rescheduled and additionally another four billion dollars injected into the SBP.
This is the time to set sail for a better future for Pakistan but we need to carefully navigate through the rough waters that lie immediately ahead.
Published in The Express Tribune, June 7th, 2013.
Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.
COMMENTS (5)
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ
" How can this balance on the knife edge be achieved? The answer lies in a drastic reduction in non-productive expenditure and a sharp increase in development expenditure."
Wow! I have been commenting on the author's many past articles on Pak economy that he was neglecting to mention the most important factor- reduction of "non-productive" expenditure. Finally he thinks it is important! Dropping the euphemism "non-productive expenditure", in the Pakistani theater it means that the disproportionately huge amount allocated to the military budget should be cut. However, in Pakistani realpolitik, we all know that it will never happen.
The problems and its best possible short term and long term solutions are well known to the government and bureaucrats must have must have placed before them the available options. Some tough options need a political will to implement . Till then status quo will be maintained. Nawaz Shaiff would like to put some small reform and taste the water first. Expectation of a big change is futile.( no reduction in defense budget).
"The answer lies in a drastic reduction in non-productive expenditure and a sharp increase in development expenditure." Thank you thank you sir. I have been saying like a broken record that no economy of the size of Pakistan can exist with such a large army and high defense expenses at the cost of poor citizens. No country would provide aid to a country which has so much extra money for such luxuries while the donors themselves are tightening their belts. There should be a consumption tax especially on all luxury items and hotels. Those who make lot of money would have to pay something via indirect taxation. The tax on high users of water, electricity, phone and other services be increased. This kind of targeted taxation would be fair and most people would not be affected.
I do not think that the new regime has the political will to implement the reforms suggested herein. Resource mobilization is the key to unlock the stagflation that has inflicted the economy for so long. I believe agriculture reforms and taxation of agriculture income is a vital area which i wonder has remained out of sight of politicians and academics. It is not that only 20% of the economy is out of taxation net but it also provides a means to help hide income of others sectors also. Most importantly foreign investment has been historically low due to insecurity and terrorism. This necessitates that all those misplaced and ill thought out policies of seeking strategic depth here and there has to be abandoned and come to terms with ground realities of feeble economic strength to pursue such exotic notions. China,Asian tigers and India have transformed their economies by attracting foreign investment. We can put our country on the radar of foreign investors only when we have succeeded to ensure peace, rule of law and security.
"It also means that ceteris paribus, Pakistan will not be able to make the payment of five billion dollars to the IMF that is due over the next year. This loan repayment will have to be rescheduled and additionally another four billion dollars injected into the SBP"
My understanding is that IMF does not reschedule loans. It can however enroll you in a new program ut that cannot happen without meeting IMF conditionalities that you disagree with. And where are the additional 4 billion dollars of SBP funding to come from - you have not clarified that - part of the same IMF progra,?
Meekal saab, I could be wrong here, so would definitely appreciate your knowledgeable input.