ISLAMABAD: Pakistan on Monday laid out a blueprint before international donors to show just how it proposes to revise its national budget in the aftermath of the worst flooding in living memory, slashing its size to a little over Rs3 trillion from a previously unveiled outlay of Rs3.3 trillion.
The revised budget, showing a cut of over Rs300 billion, envisages a massive reduction in development spending, a course of action likely to take a heavy toll on employment and growth.
The blueprint was shared with the international community on the concluding day of the Pakistan Development Forum conference.
The cut will reduce the size of the national budget to slightly over Rs3 trillion from Rs3.3 trillion. The federal budget will be slashed to Rs2.5 trillion.
Nonetheless, the revised budget is not without underlying risks, as the government has initially shown Rs66 billion as additional revenues in the plan, subject to parliamentary approval of the reformed general sales tax bill, flood surcharge and two per cent special excise duty rate.
If the government fails to get the reformed general sales tax bill passed from parliament due to stiff opposition from the MQM and PML-N, the government will either have to further cut the budget or borrow an equivalent amount from the State Bank of Pakistan.
On top of that, the government did not show the Rs72 billion cut applied on the Benazir Income Support and Internally Displaced Persons programmes. The government describes this cut as a reprioritisation.
The money saved under these heads would be diverted to flood-related reconstruction projects.
“The sacrosanct number for the government is 4.7 per cent of Gross Domestic Product (Rs812 billion) budget deficit target and if it could not deliver on any account it will make further adjustments in the budget,” said Finance Secretary Salman Siddique.
The inability to get the bill passed will result in a further Rs66 billion cut on the budget, dragging the number down to Rs361 billion. The finance secretary said that the revised budget will not be tabled before parliament for its assent. Only the approval of the cabinet and parliament’s standing committees on finance will be sought in December.
The revised budgetary plan envisages Rs250 billion cut on federal and provincial development programmes. Independent experts say that it will have dire implications for job creation, economic growth and revenue generation. Britain’s Minister for International Development, Andrew Mitchell said that Pakistan needs annual 8 per cent growth rate to create jobs for the fast-growing population.
The development spending spurs private sector investment. It is also an important source of revenue generation for the Federal Board of Revenue in the shape of withholding a part of payment to contracts as tax. The proposed plan includes Rs140 billion cut on federal development spending and Rs111 billion cut on provincial development programmes.
The revised documents show only Rs44 billion cut on current expenditure – Rs24 billion by the federal government and the remaining by the four provinces.
The revised budget deficit target, a gap between income and expenditure, is Rs812 billion or 4.7 per cent of the total size of the economy, which is Rs119 billion more than the pre-floods budget. Even the revised budget deficit target is dependent upon how the provinces show fiscal responsibility.
The provinces are assigned to create Rs61 billion savings as against Rs171 billion deficits they were showing in their pre-floods budgets. The finance secretary said that for flood reliefs Rs150 billion are required this year and Rs61 billion will be made available by the provinces.
He said the government has increased electricity subsidies from Rs30 billion to Rs66 billion. However, the demand for the electricity subsidies was Rs256 billion. On top of that the government will spend Rs40 billion on account of interest payments against Term Finance Certificates, the instruments used to generate Rs301 billion to pay back the inter-corporate debt of public sector companies. “Perhaps it is not the real reform agenda…we need to spur growth while the cut on development spending will have negative implications,” remarked Dr Abid Sulheri, an economist.
The finance ministry sources said that the government was still overstating revenues, particularly the non-tax revenue. They said that the authorities have added Rs50 billion in non-tax revenue on account of 3G Licences to telecom companies.
“This money may not be realized this year,” they added. Moreover as against Rs125 billion ($1.4 billion) of Coalition Support Fund from the US Pakistan may receive a maximum of Rs86 billion ($1 billion). These two heads will make an approximately Rs90 billion dent on the budget deficit target which may end up above 5 per cent of GDP, they added.
Published in The Express Tribune, November 16th, 2010.
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