Budget: Targeting The Impossible

By Amir Zia
June 5, 2011
The News

Pakistan has been missing its revenue and fiscal targets for four years in a row now and meeting them remains vital not just to satisfy the International Monetary Fund, but also to revive the country’s economy which remains stuck in a low-growth and high- inflation cycle.

These are indeed tough and depressing times for the Pakistan economy, but going by Finance Minister Abdul Hafeez Shaikh’s assessments, a turnaround now seems within grasp. After braving all the aggressive booing and hostile sloganeering of Pakistan Muslim League Nawaz (PML-N) lawmakers a day earlier, the finance minister bounced back and appeared his usual calm, poised self on Saturday at the post-budget press conference, trying to explain and sell his budgetary measures, which many experts believe remain unrealistically optimistic.
But Shaikh and his economic team members appear unruffled by the bitter criticism of political opponents and those experts who predict only gloom and doom for the economy.
The post-budget press conference, where orderly-seated journalists appeared in a sharp contrast to the rowdy and unruly PML-N lawmakers, provided Shaikh a perfect platform to explain what he could not do in the National Assembly. And Shaikh certainly made the best use of the opportunity, speaking with eloquence and conviction — a more or less similar impressive performance, which he gave last year while presenting the budget of 2010-11. However, his pleas to reform and restructure the economy and expand the tax-base at that time failed to impress his political bosses and the Pakistan Peoples’ Party (PPP)-led government missed most of the crucial targets set for this out-going fiscal.
But this poor performance apparently has not dampened Shaikh's spirits. He looks convinced that measures taken so far provide a foundation to build-on and will lead to a better economic performance in the coming year. “We may have not achieved 100 percent results, but more than 50 percent work has been done,” he said.
While many may find this performance below average, the government maintains that it remains satisfactory against the backdrop of the country’s worst floods in its history, the sceptre of terrorism and high global oil and food prices.
Shaikh insists that there are reasons to be optimistic about the country' economic team performance in the new fiscal year as he aims for some ambitious revenue and fiscal targets, which most experts find difficult to achieve. For many sceptics, the most improbable milestone in the 2011/12 budget — having an outlay of 2.767 trillion rupees -- is that of raising revenues of 2.732 trillion that includes both tax and non-tax revenues. The Federal Board of Revenue (FBR) will have to collect a staggering 1.952 trillion rupees in the coming fiscal, compared with the targeted 1.588 trillion rupees for the outgoing fiscal.
The government hopes to achieve this target on the back of expanding the tax-net and a crucial step in this regard remains bringing several sectors, which so far have enjoyed exemptions, under the umbrella of general sales tax.
Another important step remains the withdrawal of sales tax exemption on local supplies of five zero-rated sectors. It indeed provides a new source of revenues for this cash-strapped government.
The government’s move to bring new potential 700,000 taxpayers in the tax-net in a country where only 1.5 million people file returns could also help boost revenues if FBR manages to follow this task till the end. The government hopes to collect 70 billion rupees through these newly identified tax-payers.
However, the task is easier said than done. It requires a bold and brave attempt from the FBR to raise 1.952 trillion rupees revenues. But the target is worth trying. Don’t we miss all those shots which we never attempt?
Another crucial target directly linked with FBR’s performance and the government’s ability to maintain financial discipline is that of keeping the fiscal deficit at 4.0 percent of the gross domestic product (GDP).
In the current fiscal, the government failed on this front as the deficit is likely to hit 5.9 percent by the year end if the government decides to allocate 120 billion rupees to settle the circular debt problem, stifling the country’s entire energy sector.
Pakistan has been missing its revenue and fiscal targets for four years in a row now and meeting them remains vital not just to satisfy the International Monetary Fund (IMF), but also to revive the country’s economy which remains stuck in a low-growth and high- inflation cycle.
One commendable proposal of the budget remains slashing subsidies target to 166 billion rupees, including that given to power sector, from the highs of 395 billion rupees in 2010-11. In the current fiscal, power sector subsidies alone remain more than 200 billion rupees. If the government meets this target, which definitely appears impossible given the current state of affairs at the public sector companies, it would be one great leap forward.
Overall, the current budget proposal focuses more on stabilisation than on trying to push the country into a high-growth trajectory through sweeping bold structural reform measures. This reflects through its decision of sticking to the current regime of general sales tax and abandoning the idea of the value-added tax and the reformed general sales tax.
The direct tax on agriculture income, which is the domain of provincial governments, also seems on the back-burner and will be imposed in a diluted form. One could expect no better from a parliament dominated by feudal lords and tribal chiefs.
Another area on which the government seems to lack a clear-cut policy remains the restructuring and privatisation of the loss-making public sector enterprises. The way this government has been dragging its feet in settling the labour dispute at the privatised Karachi Electric Supply Company manifests a contradiction in policy and action. The government needs to align them, though it seems an impossible task given the fact that it has entered the fourth year in its office and is now eying the next general elections. One should not expect difficult and bold decisions at this particular juncture from this politically-embattled coalition government, which does not want to upset the carefully laid applecart at this point in time.
Under these circumstances, if Finance Minister Shaikh and his team manage to achieve the revenue target, keep the fiscal deficit at 4.0 percent and boost growth to over 4.0 percent in fiscal 2011-12, it will be a huge achievement. Let’s hope that they succeed this time and achieve 100 percent results. Pakistan’s economy can’t afford any more failures and mistakes.