Evaluating the Federal BUDGET 2016-17, A package for consolidating macroeconomic fundamentals

federal budget

The federal budget for FY 2016-17, which was presented by Finance Minister Ishaq Dar on June 3, seems to be a continuation of the status quo with respect to the overall policy reform. However, by and large, it is a good one in the current pressing and depressing economic environment of the country. With a focus on growth and consolidation of the macroeconomic fundamentals, the budget seems tilted toward relief and concession for different sectors of the economy and various segments of the society. A comprehensive package for agriculture, as presented by the Finance Minister, was the need of the hour and it can be expected that the measures announced in the budget would spur its growth; ensuring its due contribution to the GDP. It is also industry-friendly as there are a number of proposals to reduce taxes and import duty and withdraw taxes on some crucial items. Here is an in-depth critique on the budget:

The federal budget with an outlay of 4.4 trillion rupees contains packages for agriculture and industry to stimulate growth and investment. The government aims to lower deficit to Rs1.615 trillion or 4.8% of the GDP; however, a fiscal deficit target has been set at 3.8% of GDP, which appears ambitious and may hurt growth. Power policy is to yield full dividends by 2018, development outlay has been fixed at Rs 800 billion, defence Rs 860.1 billion (up 11%), and tax collection target has been set at Rs 3.621 trillion (up Rs 160 billion). Overall, some good steps, but in essence the budget 2016-17 falls short of addressing the real issue of the economy: “Competitiveness”. Pakistan’s economy today has simply lost its competitiveness. Meaning, it is not economically viable or internationally competitive to produce here: agriculture or manufacturing. And this in mind, missing is a reformed long-term strategy to reactivate competitiveness to make Pakistan an interesting place to invest.

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federal budgetThe farmer today is struggling because given the cost of his inputs, his produce can be imported at much cheaper rates and that too of a superior quality. For example, in wheat the international field/farm prices come out almost 40% cheaper, rice around 30-35%, sugarcane about 45%, and cotton between 10-15%. Skewed agriculture policies coupled with highly questionable seed supplies saw Punjab cotton crop drop by nearly one-third in 2015-16; and also the quality level traditionally associated with it. On the other hand, India, which till 2002-03 was producing less cotton than Pakistan has not only upped quality but is also on course to surpass an annual production of 38 million bales, nearly 3 times our size. The loss of agriculture competitiveness doesn’t end here. Across the border, the Indian farmer produces horticulture at nearly 50% the cost of its counterpart in Pakistan and seasonal fruits on average leave 30% cheaper coming out from the orchards. In this context, the move to cut urea fertilizer price by Rs 450/50kg bag, DAP fertilizer by Rs 300/50kg bag and reduce off-peak power tariff for agriculture tube wells by Rs 3.5/unit, are welcome steps. Still, one would have liked to see more effort from the government to minimize crop risk for the farmer; similar to the ones recently announced by India: A new type of crop insurance scheme (Pradhan Mantri Fasal Bima Yojana) that mitigates crop risks, but where the tab is mainly picked up by the government. In essence, it reduces manifolds the premium payable by the farmer and its direct claim transfer instruments like mobile phones also avoid transactional deductions and unnecessary claim processing delays.

federal budgetThe announced measures to give a 5-year tax relief to new industrial investments, allow duty-free import of machinery and redemption of zero-rating in five major export-oriented sectors, textiles, leather, carpets, sports goods and surgical instruments, are all laudable and were much needed. Also, the endeavour to supply uninterrupted power to industry is a step in the right direction.

However, these announcements failed to capture a spirit where removing unnecessary burdens is only one part. The other being that competing governments are in fact going a step further by actively supporting home manufacturing, to gain increased global market share. More needs to be done here: rationalizing power tariffs: removing excessive bureaucratic oversight; undertaking long overdue labour and investment reforms; prudent approach toward compliances; standards’ harmonization; checking corruption; strengthening the regulator; and revisiting ill conceived trade agreements. Further, it would have been nice to see new accelerated tax incentives and elimination of all regulatory barriers on the information technology (IT) sector, to rapidly scale up development of IT.

federal budget 3Currently the most important — and ironically, where the budget has been most disappointing — is regarding the power sector. Our power policy today is deeply flawed. New plants and enhanced capacity (with or without CPEC) are very welcome, but what we really need is for power to be produced at internationally competitive rates. No point producing power, which down the road will either be unaffordable or simply render the national industry unviable. For example, new coal deals are being negotiated by countries at 5-6 US cents per unit whereas we are guaranteeing 8-9 cents to our Chinese and Middle Eastern investors. Likewise, new solar deals are being struck at 4 cents per unit while we set up the Jinnah Solar Park at 12 cents. Further, 3 years have gone by and reforms are still missing.

While enhancing periods for capital gains on securities and real estate is a positive move that brings in a sense of equity and reduces excessive speculations, but contrary to government’s original claims, bracketing filers and non-filers alike is rather surprising. Also, disappointingly the speech failed to admit the counterproductive nature of the present revenue collection drive and the need to correct it. The government boasts of raising tax revenues by more than 40% in recent years and now wants to set the bar higher by another 20%. What it fails to mention though is that almost all of this has come through double taxation and primarily from further burdening existing taxpayers, thereby sucking the liquidity out of legitimate businesses; in the process pushing them to the brink of closure. It is causing FBR image to fall to new lows where people either prefer to work outside the documented domain or simply not work. The pointless amnesty scheme also failed miserably since there is a trust deficit and an erosion of moral authority in a system that allows a single bureaucracy functionary access to as much as 700 million rupees in cash!

Only a few days before the budget, political considerations once again took precedence when despite rising global oil prices the government refused to adjust domestic petrol prices upwards. We must remember that for most Asians, oil windfall never appeared. Countries cleverly used the advantage to provide cheap energy to their industry, in-turn promoting industrial competitiveness, exports and employment generation. Example: Bangladesh. Here, we have instead been smoking the advantage away by providing cheap fuel to motorcycles & automobiles.

High debt and it’s poorly prioritized spending invariably hurts competitiveness. It not only crowds out the private sector, but also diverts the capital to inefficient hands and distorts market equilibrium by investing into unsustainable projects. The real figures on debt were cleverly manipulated in the budgetary tabulations, once again raising fears on the very credibility of the government numbers. For example, actual foreign loans for the next financial year add up to $10 billion, but the budget specified only $6 billion, with $4 billion conveniently excluded under different pretexts.

federal budget Disappointing again are long-term social initiatives, since one would have thought that taking queue from our neighbour, this govern-ment would also look at innovative solutions to improving healthcare and education. Indian policy-makers — after becoming conscious that despite high growth its poverty pockets remain un-dented — in their budget mainly targeted employment generation and advance healthcare to workers. Their new package provides a more inclusive and affordable healthcare insurance to the low-wage segment. In education, the centre took the lead to introduce “Common Core Education Standards” as the law of the land. This is to raise education benchmarks across the country, so school graduates meet the higher skill levels that good jobs will increasingly demand.

In conclusion, the budget lacked ingenuity to resurrect a struggling economy and one can only hope that our economic managers recognize the shortcomings to still try and address its weaknesses. We all know that it is perhaps their last budgetary opportunity to ring meaningful changes, because the next will be an election time budget when typically populism takes precedence over reforms.

Salient Features

federal budget The budget 2016-17 has the following salient features:

  1. The total outlay of budget 2016-17 is Rs 4,894.9 billion. This size is 10% higher than the size of budget estimates 2015-16.
  2. The resource availability during 2016-17 has been estimated at Rs 4,442.0 billion against Rs 4,168.3 billion in the budget estimates of 2015-16.
  3. The net revenue receipts for 2016-17 have been estimated at Rs 2,779.7 billion indicating an increase of 12.8% over the budget estimates of 2015-16.
  4. The provincial share in federal taxes is estimated at Rs 2,135.9 billion during 2016-17, which is 15.5% higher than the budget estimates for 2015-16.
  5. The net capital receipts for 2016-17 have been estimated at Rs 453.6 billion against the budget estimates of Rs 606.3 billion in 2015-16 i.e. a decline of 25.2%.
  6. The external receipts in 2016-17 are estimated at Rs 819.6 billion. This shows an increase of 9.1% over the budget estimates for 2015-16.
  7. The overall expenditure during 2016-17 has been estimated at Rs 4,894.9 billion, out of which the current expenditure is Rs 3,844.0 billion and development expenditure is Rs 1,050.9 billion.
  8. The share of current and development expenditure respectively in total budgetary outlay for 2016-17 is 78.5% and 21.5%.
  9. The expenditure on General Public Services is estimated at Rs 2,707.2 billion which is 70.4% of the current expenditure.
  10. The development expenditure outside PSDP has been estimated at Rs 156.6 billion in the budget 2016-17.
  11. The size of Public Sector Development Programme (PSDP) for 2016-17 is Rs 1,675 billion. Out of this, Rs 875 billion has been allocated to provinces.  Federal PSDP has been estimated at Rs 800 billion, out of which Rs 282 billion for Federal Ministries / Divisions, Rs 318 billion for Corporations, Rs 20 billion for Pak Millennium Development Goals and Community Development Programme (MDGs), Rs 28 billion for Special Federal Development Programme, Rs 7 billion for Earthquake Reconstruction and Rehabilitation Authority (ERRA), Rs 25 billion for Gas Infrastructure Development, Rs 100 billion for Special Development Programme for Temporarily Displaced Persons (TDPs) and Security Enhancement and Rs 20 billion for Prime Minister’s Youth Programme.
  12. To meet expenditure, bank borrowing has been estimated for 2016-17 at Rs 452.9 billion, which is significantly higher than revised estimates of 2015-16.

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