Federal Budget 2017-18 and its Repercussions

by Dr. Muhammad Zubair Mumtaz

 

Assistant Professor

School of Social Sciences & Humanities

National University of Sciences & Technology

 

 

 

The federal government has presented a budget of Rs4.75 trillion for the 2017-18 financial year. The overall statistics as per budget are optimistic due to higher spending proposed for developmental projects which are associated with the general elections to be held in 2018.

The main targets as set out by the government are: increase in real GDP growth of 6%, investment-to-GDP by 17%, developmental expenditures of over one trillion, inflation rate by 6%, budget deficit at 4.1% of GDP, and tax-to-GDP at 13.7%. Comparing the targets of the 2016-17 financial year to the actual achievements, the government claims to have grown GDP by 5.3%, the agricultural sector by 3.5%, the industrial production by 5.0%, and the service sector by 6.0%, the fiscal deficit decreased to around 4.2% and the inflation rate is roughly 4.3%. Over 40% increase in imports of capital goods is mainly due to the China Pakistan Economic Corridor (CPEC) projects. On the export side, the government has provided a comprehensive package of Rs 180 billion for exporters to help facilitate and promote exports in the country. As far as foreign exchange reserves are concerned, these remained at US$ 21 billion and remittances increased to US$ 15.6 billion. Recently, the stock market index reached 52,500 and this has been an increase of 43.8% when comparing the current index level to the index level last year, which was 36,500. Another claim made by the government is that funds are being borrowed solely to finance developmental projects. The government introduced policy rate (i.e. 5.75%) during the year with a reduction of 50 basis points in the discount rate (i.e. 6.25%) to provide opportunity for creditors of the private sector.

To assess the performance of various sectors, I will start with the agriculture sector wherein a number of initiatives were undertaken in the 2016-17 budget. These initiatives included the insurance of crop loan, the livestock insurance, concession of customs duty on the dairy, livestock, and poultry sectors, the elimination of sales tax on pesticides, the exemption of customs duty on cool chain machinery & silos, and a reduction in fertilizer prices. These incentives helped farmers to grow agricultural products by 3.5%. Yet for the stimulation and acceleration of growth, the government is required to continue to provide these incentives during the 2017-18 financial year. The government has proposed an increase in financing to the agriculture sector of Rs 1,001 billion as compared to previous estimates of Rs 700 billion which illustrates a healthy sign with a view to increasing the productivity.

The manufacturing sector constitutes the second largest sector which is 13.5% of GDP and at the same time generates a large number of industrial employment. In the 2016-17 financial year, this sector recorded an impressive growth rate of 5.0%. To promote and stimulate further growth in manufacturing sector, the government is required to overcome the load shedding problems. Textiles are considered an important sector of the economy making up 64% of total exports and the government is giving various incentives to expand this sector.

However, because the costs associated with running a business are increasing, it is difficult for the textile units to be competitive.

Generally, developmental activities positively influence economic activities. If funds are distributed through representatives of the legislative members which is a common practice, then a vast manipulation of funds is witnessed due to poor planning and activation of the allocated projects. The distribution of funds with a proper plan and community empowerment is vital so as to provide better results in identifying the requirements of undertaking new projects.

Overall, the cost of doing business is swiftly increasing owing to the fact that prices of inputs increase because of a No Check and Balance system to monitor and control thereof starting from raw materials to finished goods. Thus, claiming to restrict inflation around 4% is questionable on account of irrationality.

Trade imbalance widened over time with an increase in imports and a decrease in exports. In the 2016-17 financial year, imports have increased by 40% in consideration of CPEC projects. Now it’s the responsibility of the government to take necessary measures to facilitate those firms to ensure export in future. It is important to highlight that a country relying on the exportation of manufactured goods may increase the revenue and ultimately help generate a positive balance of trade.

An important indicator of the economy is the stock market, though it’s rising unprecedentedly even then it has been adversely affected due to preliminary actions taken by Joint Investigation Team made under the orders of the Superior Court of the country to probe into Panama leaks. However, it is appreciated that the reforms are undertaken by SECP to apply upper and lower caps so that investors may not incur huge losses.

Presently, the country is facing acute shortage of electricity which has adversely affected the businesses as well as the life of general public. To overcome this issue, the government proposed Rs 401 billion for power sector development including an investment of Rs 317 billion to be undertaken by WAPDA for the 2017-18 financial year to produce 15,000 MW as compared to 10,000 MW for the 2016-17.

This fraction of additional production portrays that the government has a plan to launch a program ‘Energy for All’ with an initial outlay of Rs 12.5 billion. Beyond all these initiatives, the government fails to fulfill its commitment to overcome the electricity problem. In summer, the current electricity breakdown persists from 6-8 hours in urban areas while 10-16 hours in the rural areas. It would, therefore, be difficult both for businesses and for the common man.

The government is unable to honor the commitment to overcome the shortage of electricity for the last four years although the debt burden accrued on account of IPPs dues. As such in presence of yet another debt burden of Rs. 400 billion it is impossible for the government to meet the demand of IPPs to dispense with their dues on account of invoices generated to the WAPDA before June 30, 2017.

While the government claims to borrow funds for the developmental projects seemingly to provide a long-term benefit to the country, it is equally important to improve and provide better schooling, health facilities, subsidized food items, and quality drinking water as the main priorities of any sensible government.

However, the main thrust of the present government is to construct underpasses, roads, metro and all other things which have no importance because of aforementioned under-utilized sectors of the human society.

The government is dependent upon a major chunk of resources based on tax collection, which is proposed to be collected at Rs 2.93 trillion. It is a good step to bring people under tax net so as to increase the existing base. This tax collection target appears to be irrational because the government has failed to take a number of concrete steps to encourage foreign direct investment, increase in foreign reserves, reduce trade deficits, overcome debt burden, and increase foreign remittances by giving more incentives to Oversees Pakistanis.

The main reason for budget deficit is the fulfilment of obligations of higher interest payments. If interest payments are extracted then budget deficit can be reduced considerably. In the next financial year, the government has to make interest payment of Rs 1.36 trillion and this debt burden is increasing every year because of exchange rate fluctuations.

The balance of payment and debt situation in the coming year 2017-18 reflects that the current non-serious attitude of the government persists and reckless borrowing with pride and pleasure continues, Pakistan is likely to face a serious balance of payment crisis in 2017-18.

In the last year of the government, it will be an uphill task to apply expressive reforms to increase exports and devise a prudent system of documented economy specifically for the industrial sectors which are a great concern right now.

Ultimately, this year is based on promises but with little resources in hand. Imports will continue to surge because of the inappropriate exchange rate and expansionary fiscal and monetary policies fueling aggregate demand mainly due to the CPEC projects.

Summarizing the above, federal budget is based on optimistic statistics. The Government, as such, may not be in a position to achieve all the projected developmental projects, or to improve the lot of common people by providing civic amenities, to pay off the debt burdens mainly of the power sector and to control and document the economy towards achieving the over-estimated tax collection base. Costly borrowing and payments thereof is another question for the government during next year to dispose-off the contracted loans from the international market in sizeable figures.

Foreign exchange reserves also speak of its volatility as far as more injections through foreign direct investment are concerned. In the end, it can easily be inferred that the present government is making things difficult for the newly elected government during the next fiscal year especially with reference to the weak political situation in the country.

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