Slippage or unrealistic targets?

Federal Finance Minister Ishaq Dar in a press briefing stated that the government may face slippages on projected budgetary targets including the fiscal deficit, Gross Domestic Product and development expenditure due to revenue shortfall and unforeseen expenditure. This acknowledgement is welcome and one would hope that it is the first step in presenting credible data that would enable the government to take to mitigating appropriate macroeconomic decisions.

The Finance Minister’s admission of slippages, however, surprises no one. The decision taken to finally begin implementing the National Internal Security Strategy (with the National Action Plan – a component of the strategy) that envisaged an outlay of around 32 billion rupees last fiscal year was allocated less than one billion rupees in the current year’s budget. Prior to the tragedy in the Peshawar army school there was a public commitment by the Sharif administration to increase funding for the implementation of the action plan; however, the Finance Minister did not enlighten the media or give a ballpark figure as to how much would be diverted to security. Dar also did not quantify the amount that would be earmarked for relief, rehabilitating and reconstruction of internally displaced persons in the budget 2014-15 and what is inexplicable is that the budget documents for the current year do not earmark any amount for this purpose and this is in spite of the fact that operation Zarb-e-Azb began in June 2014.

We have consistently maintained that budgetary targets for the past two decades at least cannot even be considered indicative targets as they lose their applicability on the first day of the new fiscal year. The reason is threefold. First, the revenue generating agency of the Ministry of Finance namely the Federal Board of Revenue is invariably given overambitious targets, especially during periods when the country is on an International Monetary Fund programme, to enable the government to show a lower deficit that is in fact achievable. However, understating the revenue shortfall has become routine and is achieved by the now usual practice of collecting advance tax as well as holding onto refunds till the start of the year, for which the budget has been announced. In addition Dar documented some non-tax revenues particularly gas cess and surcharge under tax revenue which accounts for a rise in tax revenue.

Secondly, current expenditure is routinely understated at the time of the budget speech in parliament and the differences between the budgeted amounts and the revised estimates have not been attributable to defence expenditure, as one would have expected, but for mark-up on loans procured by the federal government. In budget 2013-14, the first budget presented by the Dar-led Finance Ministry budgeted mark-up was 1,154 billion rupees while the revised estimates gave a total of 1,187 billion rupees (or a difference of 33 billion rupees). The other major component of a rise in current expenditure is subsidies whereby they are underestimated at the time of the budget (as part of the conditions of the IMF loan) and later raised upward under public pressure. In recent years public pressure has mounted due to the failure of the government (PPP-led as well as the incumbent) to deal with the power sector crisis effectively which accounts for rising electricity bills with higher load-shedding. Subsidies were budgeted at 240 billion rupees last year while revised estimates gave a total of 323 billion rupees.

And finally the federal government in order to contain the budget deficit to a level that would be acceptable to the IMF has been compelled to lower outlays on development expenditure – from the budgeted 540 billion rupees to 425 billion rupees last fiscal year. This in turn has impacted negatively on the growth rate though national data released by the Pakistan Bureau of Statistics (PBS) which operates under the Minister of Finance (accounting for parliamentarians, economists and analysts challenging the data released and urging the government to grant autonomy to PBS to ensure that policies are implemented that are appropriate given the real state of the economy but to no avail) present a rosier picture. Thus it is unclear how many would believe the government when it claims that inflation has come down to 6.1 percent from 8.9 percent in the first six months of last year.

The economy received a buffer from a rise in remittance income and this rise perhaps has less to do with Dar’s policies than the fact that historically low interest rates in the West together with an erosion of income at home account for a rise in inflows. Foreign direct investment remained appallingly low at 422 million dollars though it did rise from last year’s total of 354 million dollars. Pakistan also met its foreign international reserves target however unfortunately the country’s foreign indebtedness rose as a consequence with the sukuk bond issue at around 6.75 percent per annum – around one percentage higher rate of return than what heavily indebted Greece managed last year. The country’s foreign indebtedness is on the rise and even if the rupee value depreciates at a conservative 5 percent per annum the foreign indebtedness would be unsustainable in years to come. There is an urgent need to revisit policies however that appears unlikely especially given the rather blatant manipulation of national data.