The Federal Budget 1995-96 – More Than Meets the Eye
To the common man, the areas of the Federal Budget that are important are those that affect his buying power. To that end, the Peoples Party’s propaganda machine is working overtime to convince the populace that the only increases proposed are the tax-hike with respect to petroleum and gas prices. Since the common man was already shelling out more for his PIA tickets and electricity (raised pre-Budget) while bracing himself for the anticipated rise in telephone and transportation prices (left to the mercy of the Corporations) it is a moot point whether the masses would have yelled with joy at the resounding theatricals of Makhdoom Shahabuddin, the Federal Minister for State, for Finance, the man elected by the PPP Government to present the Federal Budget prepared by others. Not known for any dramatic potential during his Sadiq Public School days, this better than average School-hockey player is obviously a late-starter to histrionics and was thus fighting a credibility problem even before he began his speech. For whatever it is worth he struck a sympathetic chord in his leader who gave him encouragement by approving glances throughout his performance (of reading the Budget). In the Post-Budget Press Conference, the Makhdoom acted as a traffic cop, deftly passing on almost all questions to V.A Jaffery (mainly) and Shahid Hasan Khan, Special Assistants to the PM, and thereby confirming what is universally known to all, that he knew nothing of the Budget before, during or after its Presentation (shades of Capt (Retd) A.A Jilani with respect to his Lower Urdu Paper in the Army).
In the 1994-95 Federal Budget, the PPP Regime had set out unrealistic targets. Failure to reach these as well as the deficit target of 4% of GDP was cause enough for criticism. The resultant shortfall was to the extent of Rs 40 billion in tax revenues. This brought the budget deficit of Rs 72 billion to well over Rs 100 billion. Ambitious targets combined with inflexible expenditures based on incorrect estimates invariably leads to frustration and a size of deficit for which the authorities are least prepared. Naturally this surprise upsets a lot of calculations on which economic forecasts are prepared, thus affecting the credibility of the system. Through the years, the rulers, whether political or military, get the blame while the bureaucrats who set up these wrong projections in the first place escape retribution, indeed are rewarded in many cases for their “flamboyance” in outrageous estimates and expertise in sleight of hand with financial figures.
The 1995-96 Federal Budget provides for the same tax revenues as in the current year i.e. Rs 259 billion. The great anomaly is that the target remains the same while in the meantime GDP increased by 4.7% and prices increased (officially) by 13% (real inflation was nearer 18%). The realism of the government’s figures is critically based on the realisation of 6.5% growth rate and developments in foreign sector as projected. More than 40% of tax revenues still comes from foreign trade and overall revenues crucially depend upon increase in production and the resultant spin-off effects. As in earlier years there does not seem to be any provision for alternate sources of revenues or for that matter controlling of expenditures should the projected increases in GNP and other assumptions not materialise.
There appears to be a deviation from the reported agreement with IMF on two major counts, viz (1) budget deficit of the order of 5% of GDP compared to the agreed 4% and (2) the reduction in tariff is not in line with the agreed schedule. It is not clear whether the departure from these two important policy areas amounts to a goodbye to the accepted IMF programme or a new deal has been clinched about which the government is silent. Apprehensions are that the deal with the IMF may have been called off “in the people’s interest”, to quote the PM and “the IMF will be taken into confidence shortly.” Unfortunately the PPP had been strait-jacketed into an agreement by the “more loyal to the IMF than the king” (ex-IMF/World Bank employee) Moeen Qureshi Caretaker Administration and while it does not behove governments to go back on sovereign agreements, the IMF prescription was getting to be harsh and going beyond “the battlefield surgery (to quote IMF President Camdessus) that IMF is mandated for.” No political government could have survived the almost punitive measures proposed by the IMF theorists on the pattern they have successfully used to destroy the economies of South and Latin American countries. In the wake of recent G-7 Summit discussions at Halifax, which authorised IMF to be tough and more publicly (rather than discreetly), it remains to be seen how IMF reacts to the Ms Benazir Budget.
As reported in the Press and elsewhere, four substantive issues have not been addressed viz (1) while it is supposed to be a “Businessman friendly” budget and seeks to promote savings and investment but the market reaction does not reflect that, though one daresays businessmen are a cynical lot not given to much gratitude (2) the Government of Pakistan (GoP) has itself set an inflation target of 9.5% and as such all increases and expenditures will be tailored accordingly. Any deviation anywhere will push inflation to double digits, a most dangerous development as this is gradually becoming a point of expectation among the economic agents i.e. of householders, savers, investors, corporate sector and even GoP circles, tending to become a part of the psyche of the general populace, (3) if all the indications of the Budget, mainly income and expenditure, particularly current expenditure is deflated by 13% (the inflation admitted by GoP), it will show little progress in real terms. GoP should take note of the fact that while during the current year growth in GDP is 1.6% higher than the population growth, national savings as a percentage of the GDP has declined from 15.6% to 14.8% thus increasing our dependence on foreign savings and (4) During 1995-96 GoP is expecting an increase in revenues of Rs 53 billion while increase in GDP is Rs 278 billion which is something like 19%. If the tax revenue of Rs 225 billion is realized for the current year, GoP expects revenue increase of only Rs 35 billion out of a projected increase in income of Rs 307 billion. This is primarily due to the fact that compared to last year new tax measures are expected to yield Rs 16.3 billion compared to Rs 45 billion last year. This is a touch of realism but if this does not materialise this may create bigger problems for the government than they are presently visualizing.
Total debt servicing (external and internal) which is estimated at Rs 157.5 billion for 1995-96 has increased from Rs 133.1 billion, an increase of 18% acting as a constraint on GoP’s policies, restricting GoP’s room to manoeuvre. One need only ask a question whether or not the debt incurred over the year has contributed to asset-creation, income from which would service the debt. As for privatisation receipts they have added to foreign exchange reserves. The idea could have been to retire foreign debt but only some part of domestic debt is being repaid with the proceeds of the sales of the family silver.
There is no doubt that we will all have to pay more for electricity, gas, water, fuel, etc. Cumulatively this will effect an inordinate rise in consumer products, as inflation begins to fuel itself we may even be close to losing control over inflation. One cannot one-sidedly condemn the Ms Benazir Government for these rises. People do not pay their taxes, return their loans, pay their utility bills, etc. Unfortunately the buck stops at the GoP treasury. Partly out of concern for the populace but mostly out of concern for its own welfare, GoP has after all taken on the IMF, better late than never. The best would have been for the Ms Benazir Government to have repudiated the sellout to the IMF in 1993 by the man without the people’s mandate, IMF/World Bank employee Moeen Qureshi and re-negotiated the harsh terms. However Ms Benazir is a political animal and being sensitive to such issues, has correctly gauged the mass mood in selecting to confront the IMF at the last minute, albeit at a bad time just after the Halifax G-7 Summit, where agreement has been reached by the World’s economic leaders to make a “horrible public example” out of those who go back on agreements with IMF. For the poor man, the shrinkage of his buying power is disastrous but not yet catastrophic. GoP could help by controlling expenditures and leakages, the best would be to decentralize the taxation system and provide for a linkage between taxation and spending at the grassroots level. The Ministry of Finance should be constrained from spending millions of taxpayers money as propaganda in advertisements designed to show us, among other things, why because of the generous increases of 35% and 7% in salary and dearness allowance in two successive years respectively, the Armed Forces are supportive of the Ms Benazir regime. The Armed Forces are constitutionally mandated to support any elected government, the suggestion of being thus open to bribery is pathetic.
Despite its many aberrations, PPP remains a political party with great talent among its members, among them economists and accountants, not to talk of advocates of financial reform. Ms Benazir will not find budgetary solace from her IMF-oriented bureaucrats in the Ministry of Finance and CBR. To come to grips with the system she must escape the clutches of the Establishment. As a businessman-turned-politician Mian Nawaz Sharif had started to display sustained flashes of independence in financial decision-making (and suffered the consequences thereby), as a politician belonging to a “born-to-rule” family (at least according to her esteemed and usually distraught mother) Ms Benazir should use the trappings of power to wean bureaucratic gnomes of the Finance Ministry away from their loyalties to the IMF towards loyalty to the State. By standing upto the IMF, albeit mostly out of self-interest, Ms Benazir may be choosing a populist cause but even tempered with prudence, this may be a perilous course for the country and the PM.
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