Analysing budget 2009-10

The government has presented its second budget in the backdrop of a difficult economic situation. Like the previous fiscal, fiscal year 2008-09 has also been a challenging year. The government was faced with unsustainable fiscal and current-account deficits, rising inflation, rapidly declining foreign-exchange reserves and the rupee coming under severe pressures.

The government had two choices to make in the 2008-09 budget–either to go for promotion of economic growth and job creation, or for stabilising the macroeconomic situation; that is, reducing fiscal and current account deficits, reducing inflation, building foreign-exchange reserves and stabilising the exchange rate. The government went for the second option, and rightly so, because macroeconomic stability is vital for promoting growth and poverty reduction.

Accordingly, the government pursued tight fiscal and monetary policies to reduce aggregate demand, and reduce imports and thus reduce the current-account deficit. The government was pursuing these policies when the rest of the world was doing the opposite–expansionary fiscal and easy monetary policies. The government was, in fact, criticised for pursuing tight fiscal and monetary policies at the cost of slowing economic activity. The critiques were wrong. Pakistan pursued tight policies as it was facing problems of excess demand while rest of the world was facing lack of demand. The policies pursued by the government paid handsome dividends, with budget and current-account deficits being sharply reduced and inflation starting to ease.

But it is too early to declare victory. Though macroeconomic imbalances have been reduced to some extent, both budget and current-account deficits remain at unsustainable levels and inflation is double-digit. Meanwhile, world oil prices are on the rise, touching over $72 per barrel and projected to reach $85 by the end of December.

Since the government believes that macroeconomic stabilisation has done its job well and it is the time to go for promotion of growth, it has prepared Budget 2009-10 in such a perspective. The new budget has been presented with a view to promoting growth with equity. An overly expansionary fiscal policy will be pursued in 2009-10 and adequate resources have also been allocated to promote equity to give a human face to them.

The government has lost patience. Total consolidated expenditure (including that in the provinces) is estimated at Rs2,897 billion and total revenue is targeted at Rs2,175 billion, thus leaving a budget deficit of Rs722 billion, or 4.9 percent of the projected GDP. Total current expenditure is amounted at Rs2,104 billion and development expenditure adjusted for net lending amounted to Rs793 billion. In development expenditure, the much celebrated Public Sector Development Programme (PSDP) – the “symbol” of growth and development – has been targeted at Rs626 billion – an increase of almost 50 percent over last year. Perhaps in the government’s view this is going to ignite growth in 2009-10, as if there is a relationship between the PSDP and economic growth. No one should be against the PSDP if its size is consistent with a stable macroeconomic framework. I am afraid that the present size of the PSDP may become the root cause of enhancing macroeconomic imbalance in 2009-10.

It is not clear why the Benazir Income Support Programme (BISP) and the allocation for the internally displaced people (IDPs) have been put under the development programme. Development spending is spending which creates assets like schools, colleges, hospitals, roads, highways and dams. What assets are these two allocations going to create? These are for social protection and intended to provide relief to deserving people. By definition, these two allocations should have been part of current expenditure. It has unnecessarily raised the size of development expenditure to Rs793 billion. One reason that I can think of is that the allocations for the BISP and the IDPs have been shifted from current to development expenditure is to meet one element of the Fiscal Responsibility and Debt Limitation Act 2005. The Act had required that revenue deficit should be zero by June 2008, and the government should have maintained a surplus thereafter. This element of the Act was violated in the last two years as the revenue deficit remained in the negative zone. The government accordingly decided to change the definition of development expenditure by shifting the BISP and IDPs relief in it and as such recorded a surplus to the tune of Rs71 billion in revenue balance in 2009-10. The government could have achieved this target in 2010-11.

The financing plan of the Rs722 billion fiscal deficit is interesting. Financing from external sources amounts to Rs312 billion and Rs391 billion is targeted to be financed from domestic sources. Within domestic sources, Rs145 billion will be financed from banks and the remaining Rs246 billion from non-bank sources. Privatisation proceeds of Rs19.0 billion will also be used for financing fiscal deficit. The heavy reliance on external sources (43 percent) to finance the fiscal deficit has become a source of anxiety and a major risk to the new budget. The advisor to the prime minister on finance, Shaukat Tarin, clearly stated in his post-budget press conference that he is confident that Rs228 billion in external assistance will be coming in 2009-10 to finance the budget deficit (Rs178 billion from FODP and Rs50 billion for the IDPs). And if, God forbid, these resources are not forthcoming, then the government will seek further assistance from the IMF to meet the budgetary gap. Why have we undertaken such a massive spending based on either uncertain sources or further borrowing from the IMF? It is strange that the IMF has allowed its resources to be used for budgetary purposes. The IMF is meant to provide balance of payments support to member-countries. This is a major departure from the past as the IMF appears to have changed its religion. We may see inflation becoming a fiscal phenomenon rather than a monetary one, the balance of payments becoming a fiscal rather than a monetary phenomenon from the IMF perspective. In my view, the government should have announced clearly in Budget 2009-10 that its fiscal deficit target is 3.4 percent of GDP (or Rs504 billion), additional spending on physical and human infrastructure would be undertaken as such and when the resources from the FODP and grants for the IDPs be available. The government could have kept the projects ready and as the money started flowing in, and activities on the new projects could have started. In other words, additional spending could have been made conditional on receiving money from external sources. In doing so, the government could have maintained financial discipline in its second budget as well.

Nevertheless, the new budget has several positive elements, such as: The allocation of Rs70 billion to the BISP, Rs50 billion for the relief and rehabilitation of the IDPs, doubling of the salaries of army personal fighting on the western borders; extending the same benefits to the entire armed forces from January 1, 2010; launching health insurance for the poor and vulnerable; promising to train and employ one person from each poor household, launching of small public works programmes to provide employment; enhancing the allocation for the People’s Work Programme; social security protection for haris; widening the scope of the workers’ welfare programme; and increasing the outreach of the borrowers for microfinance. These programmes will indeed help in alleviating the sufferings of the poor and vulnerable sections of society. In the real sector, the agriculture and water sectors have received much greater attention, for which the government should be commended. But at the same time, the livestock and dairy sector, which accounts for 50 percent of agriculture, have been ignored.

Budget makers make efforts to create a balance between limited resources and unlimited demand. This work demands patience on the part of the budget makers. Have the budget makers lost their patience? Have they succeeded in creating a balance between limited resourced and unlimited demand and expectations? I leave it to the readers to decide.

The writer is dean and professor at the NUST Business School, Islamabad

Regard's

Muhammad Bilal Sarwari
http://www.pakistanlaw.net