Conversation with Dr. Ayub Mehar, a renowned economist
PAKISTAN & GULF ECONOMIST had an exclusive conversation with Dr. Ayub Mehar regarding FEDERAL BUDGET 2022-23. Excerpts of the conversation are as follows:
Though federal budget 2022-23 has been discussed by the various segments of the society including supporters of the coalition government, PTI supporters, business community, salaried persons and common people, however, the most considerable point is that all the comments on the budget are based only on the budget speech and the ‘Salient features of the budget’ prepared by the Ministry of Finance and presented by the Finance Minister. But, reality is unleashed in the budget documents.
One can’t ignore the fact that it is the first budget after the autonomy of the State Bank of Pakistan (SBP). The law of autonomy of the SBP was legislated by PTI government last year. Certainly, the autonomy of a central bank limits the ability of government to finance its fiscal deficit through monetary system. To finance its deficit, government has to rely on borrowing from commercial banks and debt markets at the prevailing interest rates. In the present context of global economic situation and negotiations with the International Monetary Fund (IMF) to maintain the required level of foreign exchange reserves, the external borrowing has a difficult option. Despite these facts, fairly a sizeable borrowing (4.6 trillion rupees) from domestic and external sources have been proposed in the budget document. It will lead to higher interest expenditures in the future, while lending to private sector from commercial banks may be adversely affected.
Another important notable point is that GDP growth estimated by PTI government was 4.8 percent but the present government has declared that actual growth was achieved by 6 percent. In this case, it should be considered a remarkable achievement of the PTI government and a surprise in the economic history of Pakistan that actual growth has surpassed the targeted growth in GDP. However, the present government has admitted that this higher level of growth will not be possible in its tenure in 2022-23. The targeted growth rate by the present government is 5 percent.
According to the economic survey 2021-22, the rate of inflation was 11.3 percent. This rate of inflation is based on ‘Consumer Price Index (CPI)’ which was 3.9 percent in 2017-18. The rate of inflation on sensitive price index which measures the change in prices of basic necessities of life is 17.3 percent which was 0.9 percent in 2017-18.
Similarly, the food price inflation has reached at 10.2 percent which was 2.3 percent in 2017-18. These statistics show that lower income households have been affected badly during the last 4 years. But the important aspect of this reality is the strategies to control over prices.
Market prices are associated with the cost of production and subsidies. Administrative measures to control the food and agriculture commodities may create rural-urban conflicts and lower production of cotton and wheat is the natural outcome of price restrictions by artificial measures.
The subsidies mechanism plays an important role to create competitiveness and control over prices throughout the world. More than 50 percent current expenditures in industrialized countries belong to direct or indirect subsidies. This ratio is 44 percent in India and 34 percent in Bangladesh. This magnitude is less than 8 percent in Pakistan, which explains the high rate of inflation in the country. It is notable that rate of inflation is 7.8 percent in India, 6.3 percent in Bangladesh and 2.1 percent in China. Despite these fact, IMF emphasizes on withdrawal of subsidies and government has accepted this condition. Obviously it will affect the export competitiveness and domestic prices of goods and services.
Another reason of higher inflation in Pakistan is the share of indirect taxes in total tax revenue. Though every government has mentioned that it will focus on direct taxes but unfortunately the share of indirect taxes is increasing since last 10 years. The share of indirect taxes in total tax revenue is less than 40 percent in industrialized countries.
The case is reverse in Pakistan. More than 60 percent tax revenues are collected through taxation on goods and services which is one of the major cause of inflation. In his budget speech, Finance Minister Miftah Ismail has indicated 4 point strategy to divert tax collection from indirect to direct taxes. To encourage entrepreneurship and discourage investment in real estates, and converting fixed taxes to minimum taxes, while minimum taxes to adjustable taxes are the measure to rationalize the taxation system. However, quantum of taxes in different categories indicates the heavy dependency on indirect taxes.
The estimated interest expenditure in the federal budget 2022-23 is Rs.3.9 trillion which is more than 40 percent of total expenditures. This ratio is less than 20 percent in India and Bangladesh. It reveals the real problem in the fiscal space of Pakistan. It is an astonishing fact that according to the ‘Fiscal Responsibility and Debt Limitation Act 2005’ the outstanding debt cannot be more than 60 percent of GDP but now this ratio has been arrived at 73 percent of GDP, which is the cause of higher spending on interest payments. Total public debt at the end of April 2022 was 43 trillion rupees while it was 52 trillion after adding other liabilities. External debt was 130 billion US dollars. Lower spending on employees’ salaries, public welfare, health and education, subsidies and the higher taxes are consequences of growing interest cost.
According to the budget documents 2022-23, estimated tax revenue is Rs7.0 trillion (9.2 per cent of GDP), which is higher than last years’ revised target by 17 percent. It is quite obvious that 17 percent increase in tax revenue at 5 percent growth in GDP and 12 percent expected rate of inflation, indicates the sizable reduction in personal disposable income and higher propensity to consume and lower savings. Consequently investable funds will decline.
The most important aspects from investors and industrialization point of view is the deficit financing through domestic debt. It is revealed in the documents that large part of fiscal deficit (2.8 trillion rupees) will be financed by borrowing from domestic market including commercial banks. It may adversely affect the domestic credit to private sector. It will be much easier for commercial banks to provide lending facility to the government at an attractive risk free rate of interest in the present scenario. In lending to government, commercial banks can avoid from risk taking activities which is an integrated part of every private business. While, the redemption of this debt in future by the government will add more burden on tax payers. The shrinking in credit facility to private sector will certainly affect the investment and industrialization. In present global scenario, it is noteworthy that world average of credit to private sector as percentage of GDP is 50 percent; it is 122 percent in middle income countries. It is 55 percent in India and 45 percent in Bangladesh. Unfortunately, it is around 17 percent in Pakistan, which tells the story behind the decline in investment in industrialization in the country. Similarly, external financing of budgeted fiscal deficit is an early indicator of the further debt burden on the economy.
For fiscal year 2022-23, Federal Public Sector Development (PSDP) is budgeted at Rs800 billion. It was Rs603 billion in 2021-22. This was Rs.1000 billion in the last year of Muslim League government. Consolidated Public Sector Development Program (PSDP) is Rs1.4 trillion which is 1.8 percent of GDP; historically Pakistan has spent around 6 percent of GDP on development budget. Why the nation has to face deterioration in infrastructure, it is revealed by the declining magnitude of development expenditure.