Business as usual (Part 2 of 2) – by Shahid Kardar

Economist Shahid Kardar

Published in The News. Read Part I here

The estimate that the government will be able to a) raise Rs19.4 billion from privatisation, given the security situation within the country and the pro-active role played by the courts in the previous privatisation of the Steel Mills and in the recent LNG affair, is rather ambitious. Similarly, the hope that the government will earn dividends of Rs3 billion from some unspecified public-sector corporations, even when nothing was received from them this year, and also receive Rs88 billion from the Friends of Pakistan forum, when we received almost Rs100 billion less than our estimates from them last year, is a wish that is unlikely to be realised in full.

Another target that looks rather ambitious is that of the government’s current expenditures. Even given Sheikh Sahib’s commitment that non-salary expenditures will be frozen at last year’s level, the decision to reduce the allocations for subsidies by Rs63 billion looks extremely optimistic in view of the political implications of raising electricity tariffs in a timely manner and at rates (an increase of an additional 35 per cent is required, even after the recent increase of 7 per cent) that will keep the power subsidy within the budget estimate. The poor man has already agreed to a bailout package of Rs9 billion for the Steel Mills — the first of many that he will have to provide. Therefore, in my opinion, the final budget deficit is likely to exceed 6 per cent of GDP unless, of course, the government eventually prunes its development spending, i.e. the PSDP, drastically.

Moreover, the more worrying aspect of the deficit is the revenue deficit, now almost 2 per cent of GDP, with the fiscal pressure growing on the federal government after the new NFC Award under which the provinces will now get 57.5 per cent of the divisible pool of resources. For 2010-11 the federal government will be at least Rs660 billion short of the domestic revenues required to meet its own current expenditure obligations.

The budget speech refers to the need for the documentation of the economy. If the government is serious, let it introduce legislation making Benami transactions illegal and insist that payments for large utility bills and taxes like stamp duty should be through cheques only. Moreover, to ensure a level playing field for the formal and organised sector, the government should lower the exemption threshold for the retail sector under the proposed ‘reformed GST’. It needs to be noted that those in the organised sector controlling a large share of the market are not complaining about the GST (e.g. manufacturers of tyres) and the sectors in which formal enterprises only have a small market share the lack of a level playing field will discriminate against them (e.g. manufacturers of shoes and those selling processed milk) making it difficult for them to compete with the informal sector (even if it is unable to get the GST adjustment on its inputs) which is selling under-invoiced Chinese products and goods smuggled under the umbrella of Afghan Transit Trade. The transition to the reformed GST is not going to be smooth since large firms operating in the sectors that were hitherto zero-rated and whose sales increased dramatically in the last four to five years are also likely to suffer at the hands of the tax authorities, because their turnovers will decline under the setup proposed post-October, and are likely to be well below their declared turnover in previous tax returns!

Moving to the PSDP, the decisions to pitch it at a level that is financeable and to focus on completion of schemes are laudable. However, what is missing is a vision. Ideally, we should know the contribution of the different sectors to growth, with the allocations in the PSDP reflecting the strategy to influence the pattern and pace of growth by enhancing the efficiency and productivity of capital and labour employed in these sectors.

The PSDP now has roughly 2,200 schemes, which with an allocation of Rs280 billion means an average allocation of Rs130 million per scheme, less than the cost of 1 kilometre of a national highway. Also, the throw-forward of Rs3.7 trillion means that the existing portfolio will take almost 13 years to complete!

The prioritisation of the PSDP allocations is also quite revealing, given the emphasis that Dr Sheikh placed on education, higher level skills and the need for energy. Higher education gets Rs15.7 billion and the MNA/senator programmes Rs30 billion, as does the Prime Minister’s Multan package, while Rs4 billion is set aside for the residences of the speaker of the National Assembly, the chairman of the Senate and for the accommodation and rest houses of the bureaucracy. In the same vein, with power a major issue affecting industrial production, exports and job opportunities — according to the IPP BNU, loadshedding cost the economy Rs300 billion — 2.5 per cent of GDP and almost 550,000 jobs — the allocation for the power sector is Rs32 billion while roads get Rs45 billion — but then industry has to produce first before it can use these roads to transport its goods!

There is also the issue of the political economy of projects — the greater the number of divisions and departments the higher the number of projects in the PSDP — these schemes provide jobs to cronies and additional cars and cell phones for the use of senior bureaucrats.

It is also time to demand greater transparency of defence expenditures, instead of single-line allocations. In this budget the allocations are Rs442 billion under the recurrent head plus Rs19 billion under PSDP plus allocations for the Frontier Constabulary, Rangers and Coast Guards and pensions of Rs72 billion, giving a total in excess of Rs540 billion — excluding the US reimbursement of the expenditure in connection with the war on terror — Rs300 per capita as against Rs225 per capita on education and health combined. We need to know on what this money is being spent — we need to assess if we are getting a bigger bang for our buck!

Finally, the key questions now worrying most are whether the present political dispensation can set a strategic direction and whether the political class has the competence to provide good governance (a recent World Bank study on governance placed us at 13 out of 14 countries — only Yemen was below us, while India and Bangladesh were ranked higher), manage the country and provide decent quality basic services to the citizenry. The continued failure of the state structure to provide just and fair solutions will facilitate our implosion from within. Extreme religious forces are being strengthened by this default and may soon be in a position to exploit the growing social disharmony. The elite is deluding itself if it thinks that it can ensure its safety and security by hiring more private guards and raising the boundary walls of its homes.