Big on aims, short of ideas

5.5% growth rate targeted for next year


Shahbaz Rana June 06, 2015
Finance Minister Ishaq Dar presents the annual budget. PHOTO: AFP

ISLAMABAD:


In an announcement that contained no surprises and no major policy initiatives, the federal government unveiled on Friday a budget of Rs4,089 billion, which seemed aimed largely at maintaining the Nawaz administration’s current policy of fiscal consolidation.


Delivering his third budget speech, Finance Minister Ishaq Dar vowed to take measures to revive economic growth in Pakistan, which has been moribund at around 4% growth per year for the past two years. Yet, in a two-hour long speech, which included bouts of Dar raising his voice in what appears to have been a feigned attempt to sound excited, the finance minister did not announce any major policy initiatives to tackle the energy sector or to crack down on tax evasion — the two biggest impediments to economic growth. Indeed, in the balance between trying to improve growth and maintaining fiscal discipline, rhetoric aside, Dar made it quite clear that his top priority would be to keep the budget deficit below 4.3% of the total size of the economy – about the same level that Islamabad promised the International Monetary Fund it would achieve.

“The budget deficit reduction will be achieved by improving revenue collection and ensuring discipline in expenditures,” said Dar.

The minister appeared to ignore altogether the Lahore High Court ruling striking down surcharges on electricity bills, which were estimated at Rs160 billion.



The proposed budget of Rs4,089 billion is only 4.3% higher than the outgoing year’s revised budget of Rs3,902 billion, said Dar, saying the government has adhered to fiscal discipline. The budget does not include the Rs316 billion in foreign loan repayments, which are not booked in the budget since they carry no financial impact on the revenue account.

Current expenditures of the government are budgeted at Rs3,128 billion, nearly identical to this year’s level. The federal development budget will be Rs700 billion, though that amount includes money spent on helping refugees displaced by the war against the Taliban.

The single biggest allocation in the budget, as it has been almost every year for the past two decades, is interest on the national debt, on which the government will be spending Rs1,280 billion, or 31% of the total budget. The amount is only Rs10 billion higher, despite almost a trillion rupees in additional debt issuance expected over the next year, largely due to lower interest rates.

The next biggest chunk is taken up by defence. Total spending on defence will be Rs1,217 billion, or 29% of the total budget, although the stated budget amount for defence spending is only Rs781 billion.

By contrast, running the civilian side of the federal government is expected to cost Rs326.3 billion, or less than 8% of the total. Pensions, both civilian and military, are expected to cost Rs231 billion including Rs174.3 billion in military pensions.

The budget documents were moved to Parliament House in a prison van while journalists staged a token walkout at the beginning of the budget speech to protest victimisation and exploitation of media persons.

Despite the focus on containing the budget deficit, Dar did announce some incentives for industrial, agriculture and export sectors. The finance minister also tried to appease government employees by merging two ad-hoc allowances of the previous years into their basic pay. He also announced a 7.5% increase in salaries as an ad-hoc allowance.

The government also increased the minimum wage from Rs12,000 to Rs13,000 per month.

The new budget also introduced an unprecedented level of new taxation that amounted to Rs267 billion, aimed at achieving the government’s ambitious Rs3.1 trillion tax collection target.

The government has set a 5.5% economic growth target next year that it wants to achieve on the back of public and private investment. In the next fiscal year, Rs1.5 trillion in public investments by federal and provincial governments will be made in the priority areas, said Dar. He said the government has identified transportation infrastructure, communication, construction and services sectors as “high growth areas” for achieving the 5.5% growth rate next year. He also announced fiscal incentives for investment in special economic zones. Special incentives for enhancing exports and encouraging banks to lend to the private sector were also announced.

The gross federal revenues have been estimated at Rs4,313 billion, up 9% from outgoing fiscal year’s Rs3,952 billion. The provinces will be transferred Rs1,849 billion on account of their share in federal taxes, leaving net revenues of Rs2,463 billion with the federal government, said Dar. The provinces are expected to run surpluses of Rs297 billion from their budgets, which will help the government to keep the overall budget deficit to Rs1,328 billion.

The federal budget deficit – the difference between income and expenditures, will be Rs1,625 billion or 5.3% of the GDP, announced Dar. To fill that hole, the government will borrow Rs982 billion from domestic sources, Rs346 billion from foreign lenders and Rs297 billion by forcing provincial governments to run surpluses. On back of provincial savings, the overall budget deficit will be brought down to 4.9% of the GDP or Rs1,422 billion, said Dar.

The expenditures controls will be entirely focused on cutting back subsidies as Dar proposed Rs137.6 billion in subsidies for the next fiscal year, 43% lower than this year’s revised Rs243.3 billion. A major cut came in the form of lower allocations for power subsidies that have been proposed at Rs118 billion as against Rs221 billion in the outgoing fiscal year.

The government has announced Rs267 billion in new taxes aimed at increasing the tax collection target to Rs3,104 billion, an increase of roughly Rs500 billion over the outgoing year’s downward revised target. Most of the new taxes are levied on the existing taxpayers with no new sector coming into the tax net. The government has heavily relied on withholding taxes to increase collection next year.

Incentives for exporters

The Export-Import Bank of Pakistan, the creation of which was announced last year will start operations in fiscal 2016, said Dar. Under the Export Refinance Facility, the government will give export financing at subsidised rates of 4.5%. Under Long-term Finance Facility, the government will offer loans at reduced rates of 6% for a period of three to ten years. The government extended the textile package to new fiscal year where it will give duty rebates to exporters in the range of 1% to 5%.

Agriculture package

The government announced an agriculture credit target of Rs600 billion. The finance minister also announced the government will give interest-free loans to small farmers for setting up solar tube-wells. Farmers with less than 12.5 acres of land will qualify for the scheme and the government will facilitate setting up 30,000 solar tube-wells in the next three years.

The government also announced that it will reduce interest rates on youth business loans from 8% to 6% due to the recent reduction in the benchmark State Bank discount rate. Dar also announced a Prime Minister’s Youth Training Scheme to provide 50,000 internships in the public and private sector to college students. The government will pay a Rs12,000 monthly internship stipend.

The minister announced that the number of Benazir Income Support Programme beneficiaries would be increased to 5.3 million next year and Rs102 billion have been allocated for BISP cash transfers.

Dar also announced that the government would be completing work on new highways, particularly on Pak-China Economic Corridor.


Published in The Express Tribune, June 6th, 2015.

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