Home / Economy / Budget – Looming Challenges | Dr Kamal Monnoo

Budget – Looming Challenges | Dr Kamal Monnoo

The 2016-17 Budget is around the corner – supposed to be announced on June 03, 2016 – and now that the myth of a recovering economy has pretty much been shattered, let’s have a look on what sort of areas Mr Dar should be concentrating on. First and foremost, his focus should be on resurrecting the sagging national exports; forget an export led growth, he will do well just by ensuring that the country climbs back to the level of exports that his government inherited when it assumed power. Pakistani exports in 2013 were around US$ 24.80 billion, it ranked 69 in the world on the value of total exports and its per person exports hovered around the $134 mark. Today in contrast, the total exports are set to close around $20 billion, the rank has dropped to 75 and the per person exports reduced to $110.

Second, if I was Mr Dar, I would be seriously worried about what if the oil prices start to truly rebound – we are already witnessing a rally in global oil prices and by all expert accounts, the level may climb beyond the $60 barrier by December 2016; that is, once the winters set in. So how will a reversal in the downward trend in oil prices affect Pakistan’s economy? For an oil importing country that can barely contain its current deficit despite record-low fuel prices, a rise in Brent crude can be disastrous: inflation will return with a venom because the supply side during these 3 years has been totally ignored, and growth will stutter further – a study by Oxford Economics indicates that economies similar to those of India & Pakistan can suffer up to 1.50 percent retardation in growth by a $40 rise in oil prices.

Third, growth in remittance is slowing down – the holiday may be over. With the Gulf economies under pressure owing to their unhealthy dependence on oil production, their capacity to absorb expatriates is taking a hit and as they undertake public spending cuts, Pakistan’s remittance fortunes are also taking a hit – Gulf countries today account for nearly 70% of our incoming remittances.

Fourth, with the government sleeping over any meaningful labour and investment reforms over the last 3 years – taking CPEC (China Pakistan Economic Corridor) out for a moment – what one sees is that investment is at its lowest over the last 10 years. While the writer is also quite sceptical on the way investments under CPEC are being managed by Pakistan and about the capacity/expertise of the Pakistani team to extract the right returns from ‘CPEC business proposal’ for Pakistan, leaving that aside, the trouble is that while the government has been gobbling up most of the credit capital to fund its ill-conceived and poorly prioritised projects, the exercise has come about at the expense of the private sector, especially the SME (small and medium size enterprises) sector. Global experiences from anywhere in the world (including developed nations like Germany, Central Europe, etc.) tell us that if the SME sector goes down so does employment generation and any hope of equitable distribution. Pakistan, with the highest mix of employable youth under 30 needs at least 300,000 additional jobs every year and this is clearly not happening.

As if the above were not enough challenges to handle, the government continues to commit hara-kiri by rapidly assuming high and expensive portions of debt! In March 2015 the total debt liability in Rupee terms stood at 19 trillion (foreign debt: 6.4 trillion and domestic debt a little over 12 trillion) & debt to GDP ratio at 66.40%. We paid $6.80 billion in debt servicing in FY15 ($5.9 billion in principal and $915 million in interest payments). Meaning, 47% of country’s revenues were consumed in debt servicing. September 2015: External debt climbed to $66.50 billion or a little over 7 trillion – a jump of nearly 10% in 6 months. As per the State Bank’s own end of year report FY15: public debt to GDP ratio stood at 64.80%. Pakistan’s indebtedness compares unfavourably with other emerging economies, namely, Bangladesh, India (now at the same level as a % of GDP), emerging & developing Asia’s average, and emerging & developing Europe’s average. The real trouble is that given present projections, there do not seem to be any realistic prospects that Pakistan will be able to repay these loans at least in the lifetime of the next five generations – And this, simply because debt sustainability of almost all the loan portfolio is questionable. We have failed to shore up competitiveness, so (as already discussed) exports are declining while imports in quantum terms are increasing. Meaning, if the low commodity cycle was to come to an abrupt end and in the process take a toll on the value of the Pak Rupee, the consequences could be horrendous. Moreover, most recent spending has been in a non-transparent way, poorly prioritised and on projects that require subsidy rather than being self-sustainable, which implies that a higher debt burden will further add to their deficits.

Tax collection drives have been nothing but botched up efforts: pointless amnesty schemes, directionless incentives, lacking any sort of ingenuity and more to do with silly numbers of tax filers – whatever 1 million tax filers means in terms of quality and potential of collection – rather than focusing on reforms and the behavioural economics element of revenue collection. Perhaps this government also suffers from a bit of moral authority in shoring up national tax revenues, an image that is not helping either! A litmus test of good economic governance always lies in the desire of people to invest their savings and to look for career opportunities at home. The very fact that Pakistanis are wanting to acquire properties and bank balances abroad and that during the last year alone, about 1 million Pakistanis left the country to find better work opportunities in foreign nations, goes on to show the government’s failure to inspire public’s confidence in the Pakistani economy.

So really Mr Dar, plenty to think about? The fear though, is that if the track record of the last three budgets under this government is anything to go, by then one should be duly worried. The danger being, that in such critical economic times, we may yet again see on June 03, a display of dodgy accounting numbers accompanied by lofty but empty claims, in the process, leaving us with another visionless fiscal year to follow!


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