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Budget basic: fiscal and monetary co-ordination

Budget basic: fiscal and monetary co-ordination

Sustaining the growth momentum, ensuring fiscal consolidation, managing balance of payments and ensuring debt sustainability are some of the philosophies on which the budget should be based. The budget situation does not seem to get better and the recent governments have certainly not attempted to reduce debt or develop a coherent strategy to improve the overall budgetary situation. Pakistan’s budget is out of alignment as there exist some structural imbalances. The government need to start taking action to address the structural issues within our national budget and ensuring that the revenues and expenditure match. Efforts to reverse the current imbalances and continued implementation of structural reforms would be needed for sustaining and accelerating growth and improving welfare. However, the efforts are marred by debilitating bureaucracy, meddling policies and weak institutions. The biggest hurdle is transparency.

Pakistan’s growth prospects continue to improve if inflation remains contained. However, weak fiscal performance and pressures on the external account pose a challenge. Owing to the swelling trade deficit, the balance of payments of the country is now projected to worsen to levels never seen in the past. With news of further increase in CAD, it could virtually erode the much-touted forex reserves within next 4 months. Independent economists say that ever-increasing trade deficit has finally exposed vulnerabilities of Pakistan’s economy. The context of increasing external financing requirements, rising interest rates and tighter global liquidity poses challenges, given that diminished reserves and elevated debt ratios have reduced Pakistan’s ability to withstand external shocks.

Rising oil prices will further add to pressure on the country’s forex reserves as we spend more on the energy import bill, push domestic power prices, increase the already high cost of doing business affecting export competitiveness, expand budget deficit, spike inflation and squeeze household incomes. On a micro level, it appears that the urban middle class is likely to get hit by the upcoming budget. The rising inflation and higher taxes will squeeze both nominal and real income of all tiers of the middle class. The massive depreciation (worst form of taxation) has already eroded the value of fixed and liquid assets, depriving middle class people of whatever little comfort they drew from the worth of their holdings. The most immediate and anticipated consequence of this year’s budget will be the erosion of the purchasing power of the common man. On a more macro level, with the global rise in fuel prices and given our current exporting industries, the cost of production will increase, making our goods less competitive in the global market.

Lowering taxes and tightening of foreign exchange regime will not result in increase in revenues and reduction of fiscal deficit. Likewise, reducing development expenditure will result in unemployment. The need of the hour is fiscal and monetary coordination which is missing. What is required is greater fiscal discipline, reforms in real-estate, power and agriculture sector and increased public-private partnership.

Pakistan can address its flawed agricultural taxation system by implementing a number of policies. A feasible starting point would be to gradually increase taxes on the most privileged one percent of farmers, who own over 20 percent of farmlands in Pakistan. As a result, the government would improve its budgetary position and acquire sufficient funds for social protection, input subsidies, price support, and enhancement of irrigation facilities. If the agriculture sector remains untaxed, the persistent strain of subsidies and low revenue may widen the fiscal imbalance.

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