Budget 2020-2021: Reality Check (Part II)

Budget 2020-2021: Reality Check (Part II)

Hassnain Javed

June 26, 2020


Moreover, the manufacturing sector will grow by 0.7% whereas the service sector will grow by 2.6%. The service sector can only grow if there is more growth in the manufacturing sector otherwise it will experience a trickle-down effect. For instance, if farmers do not have a higher yield and farm productivity, he will never plan to spend on tourism or avail other services. If the farmer has an output equivalent to its given inputs or slightly higher he will primarily focus on the necessities to be fulfilled rather than sending his children to urban cities for higher education instead will ask his children to stay in the village and attain the education. In crux, if there is lower growth in the manufacturing sector then technically the service sector cannot flourish. Also, the government employees do the major chunk of spending whereas in the coming fiscal year they have a 14% cut in their regular pay. Thus, they will also not contribute much to the service sector. However, the tourism sector is open amid COVID19 probably it can generate some pennies but realistically cannot provide cushion to higher growth in the service sector.

According to an Economic Survey of Pakistan, the public sector enterprises primarily; Pakistan Steel Mills, Pakistan International Airlines, Pakistan Railways, and other 34 public sector enterprises annually gallop approximately Rs.1150 billion. In contrast, as per the government spokesperson presenting budget said there is an Rs.1300 billion deficit. I wonder where Rs.150 billion deficit will get adjusted. However, the ruling government proclaimed to bring betterment indeed efficient management system and target towards self-sustainability in the existing public sector enterprises with the help of 200 technical expert teams. The Pakistan International Airlines (PIA) Chairman frequently visits the concerned Minister and Prime Minister for the monthly deficit amounting to Rs.6 billion. Although, there was a hefty reception of PIA.

Pakistan is under hot waters and it requires the immediate and appropriate actions to be undertaken to get Pakistan out of the macro and microeconomic imbalances

Besides this, the Finance Minister during a seminar held in Islamabad in January 2020 stated that Pakistan has to repay Rs.3500 billion interest on loans whereas the government spokesperson-presenting budget said Pakistan has paid off Rs.5000 billion interest on loans in the fiscal year 2019-2020. As we can see, there is a straight difference between Rs.1500 billion. Interestingly, right after the budget presentation, the Finance Minister told the media that Pakistan has paid of Rs.2900 billion interest on loans for the fiscal year 2019-2020. Therefore, it is difficult to understand either Rs.3500 billion, Rs.5000 billion, or either Rs.2900 billion is the right statement. There is another misstatement during the budget that the existing government has taken the economy out from B3 negative to B3 positive although the scenario was different. The economy experienced negative B3 growth due to the current policies and B3 negative growth does not turn into positive directly it first requires getting neutral and then translating into growth. If we have a glance at Moody’s report B3 is neutral now and will not turn positive until unless Pakistan comes out from FATF grey list. Currently, Pakistan’s sovereignty is pledge due to inefficiencies and incompetency of the concerned authority in power. Moreover, it is said there is no land grant given during the fiscal year 2019-2020 however, Rs.420 million had been granted.

Another interesting contradiction made during the budget presentation is budget deficit amounting to 9.1% of the GDP whereas by the end of the speech the spokesperson said the budget deficit is 7% of GDP. Moreover, the government believed they have made two important contributions targeted on economic welfare and targeted subsidy, which includes Ehsass Program (Rs. 208 billion projects) although Pakistan did not even have 14% of inflation, likewise, Higher Education Commission (HEC) which budget has been raised from Rs.59 billion to Rs.64 billion although increase by Rs.5 billion is meaningless. Moreover, the Public Sector Development Program (PSDP) has been raised to Rs.650 billion that is the Federal government development program. Furthermore, it is also stated during the budget presentation that the ruling government has adopted Rs.1100 billion circular debt in the power sector. Although, the previous government has inherited Rs.480 billion circular and left with the valuation of Rs.1100 billion in 5 years tenure. However, the current government has increased circular debt by more than Rs.2400 billion in two years. Apart from this, ML1 (Karachi-Peshawar Railway Line) is an Rs.7 billion project however Rs.24 billion budget is allocated for it. The main highlight of the budget is the non-existence of the term China-Pakistan Economic Corridor (CPEC) and no budget or either fund allocation for CPEC and its related projects. Although the Ministry for Climate Change gets the Rs.6 billion budget allocation, Rs.20 billion is allocated to the Ministry of Science and Technology, Rs.40 billion for Railway ministry. However, there is no specific budget allocation for CPEC and its related projects. Also, there is approximately Rs.115 billion tax revenue collection from the Tobacco and Narcotics sector that is 60% of the value, and the remaining 40% is not collected due to tax evasion. The illegal tax mafia who were penalized by the existing government has been given huge relief by having duty based on grams of filters purchased rather than the cost price of filters. It might not be major tax relief for taxpayers but surely for tax-evaders. Lastly, the government has announced the imported clothes and its related products to be duty-free as clothes were smuggled. Nevertheless, this will ultimately cause disaster and shutdown of the local textile industry as the imported clothes will come in bulk and cheaper due to their mass-scale production.

To conclude, Pakistan is under hot waters and it requires the immediate and appropriate actions to be undertaken to get Pakistan out of the macro and microeconomic imbalances. If a similar situation persists then certainly the public at large will lose hope. The ruling government had established higher expectations that require to be fulfilled as the evidence of COVID19 changed the global power dynamics. The leaders of Pakistan need to be watchful and well prepare for the existing deep-rooted economic epidemic. It is a need of time to devise a vaccine for economic stability rather than running the testing and experimental trails as it is not the cure to root cause problems.

Budget 2020-2021: Reality Check (Part I)

Budget 2020-2021: Reality Check (Part I)

Hassnain Javed

June 25, 2020

Some facts and realities are certainly unpleasant to observe however, they exist in a way, which cannot be ignored. Pakistan’s economic budget is one such example garnished with top quality ingredients as expensive as saffron but the main ingredients of the budget lack the true essence. The budget presentation started with the 18th amendment violation as all the provinces have the right to decide the distribution and allocation of the given budget. Since Pakistan gain independence, for the first time, ever amount of development funds allocation for every province was announced during the budget presentation. The Federal government does not possess the right to intervene in the provincial budget distribution, prioritization of funds allocation as respective provinces can self-generate the funds with given resources when and where required. Especially after the 18th amendment, the provincial governments have the right to have foreign loans, introduce taxes, and can generate funds through other means such as by having public-private partnerships. It is a pity that the opposition leaders did not notice this violation and put forth the argument against it.

Moreover, the Federal government has set the target of approximately Rs.3800 billion tax revenue collection for the fiscal year 2020-21 whereas the tax revenue collection for the past fiscal year was approximately Rs.2900 billion, and this tax revenue collection was done in Corona free days. As Pakistan experienced, evident of COVID19 by the end of March 2020, that is the tenth month of the fiscal year 2019-2020. Pakistan was having a full spree of PSL matches by the mid of March 2020. It is important to understand, first, ten months’ data is used for presenting fiscal year data.

However, now the global dynamics have experienced a massive shift due to the COVID19 pandemic. In the given budget of Pakistan for 2020-21, it is said to be tax-free. I wonder how they will cope with the given target and fill the Rs.900 billion budget deficit. Now, what will happen it will lead to default the target. Although, the serving government has promised me the IMF to introduce Rs.900 billion new taxes to fill the gap. The question arises from where Rs.900 taxes will be generated. Thus, a counter-argument that arose upon deep analysis is the increase of given tax rates for instance the tax of cold beverages was initially 13% but now it has increased to 25%. Similarly, the tax on tobacco was initially 65% but now it has risen to 100%. Thus, the traditional formula of squeezing the given lemons in the market. Nevertheless, in the given circumstances it is not very desirable to fulfill the given target by increasing the given tax rates.

In the past three months, Pakistan’s unemployed workforce has also risen by 4 million. The agricultural growth has been presented as 2.8% but the real trick to show growth in this sector is by including livestock, which contributes almost 52% of the agriculture growth

Besides this, it seems to talk of billions and having a cart of snacks. According, to the State Bank official figures Pakistan’s economy, have undergone -0.5% negative growth second time since its independence that indicates the economy is shrinking. Pakistan experienced negative growth for the first time in 1951. At the time of independence, a lot many people have migrated from Punjab and Karachi to India whereas Parses and influential Hindu’s owned most of the properties and assets in Karachi and Sikhs were operating businesses in Punjab. Therefore, after the partition between India and Pakistan in the 1950s there was the establishment of resettlement commission. Although, there was the selling of properties in peanuts the proceedings were transferred to India and vice-versa. It explains that during a short period there was a flight of money from Pakistan reserves to India in specific that led to negative growth. Now, after 70 years, Pakistan has experienced negative growth and it should not be entitled to COVID19. Indeed, the worsening of the Pakistan economy has started much earlier as the private industrial sector has paid back more loans rather than issuing new loans. Here, one needs to pause and think, how, when, and where the money is transferred from Pakistan that has ultimately caused negative growth. It is much important to ponder on this matter as Pakistan has undergone much worse situations in the past for instance after nuclear experiments international sanctions were imposed besides that there was 1.45% growth. Therefore, it is a certain heavy amount of money transferred from Pakistan by the people sitting right and left to the power poles.

In the past three months, Pakistan’s unemployed workforce has also risen by 4 million. The agricultural growth has been presented as 2.8% but the real trick to show growth in this sector is by including livestock, which contributes almost 52% of the agriculture growth. However, real-time growth in agriculture is much less. According to estimates by the private sector, there is approximately 5% negative growth in the agriculture sector in the fiscal year 2019-2020. Moreover, there is no direct tax on the agriculture sector in specific although farmers do pay income taxes it is not considered as direct tax from the agriculture sector. Now, for the fiscal year 2020-2021, the government has set the target of 2.8% in the agriculture sector, 0.1% in the industrial sector that pays the tax, 0.7% growth in the manufacturing sector, -2.5% growth in the corporate sector that primarily provides the employment. It implies that the government has further planned to shut more factories in the fiscal year 2020-2021. Likewise, to present overall growth in the industrial sector government has introduced construction as a new component and given it a status of the industry. This newly introduce sector will show a growth of 3.4% that will overall present growth in the industrial sector. It is an easy formula to create a lose-win situation indeed none less than hoodwinked.