Mr Shaukat Aziz, our soft-spoken finance minister, is a fortunate person. For two years in a row, he has not had to stand in parliament and sweat about making a budget speech without drowning in a sea of cacophony, as was “normal” during the heady days of democracy. Better still, he has not been forced to listen to the unending “critiques” of party political faithfuls belonging to the “other” side. No parliament, no accountability. But how lucky can you get! Mr Aziz was reprieved when this year’s budgetary blues were neatly eclipsed a day after the budget by the rather dramatic ascent of General Pervez Musharraf to the Presidency!
But, to give the devil his due, it must be admitted that Mr Aziz hasn’t desperately tried to hide all the unpalatable truths or gloss over most of the unpleasant facts. GDP growth last year was listed at 2.6% (target 4.5%), even though it might conceivably turn out to be slightly higher when all the figures are collated and analysed in September. In the past, it was the other way round – the rosiest possible picture of achievements was painted at budget time and quickly curtained off from scrutiny until the “provisional estimates” were quietly “fixed” a couple of months down the line. Nor has he tried to fudge last year’s fiscal deficit or pretend that revenue targets were adequately met. He has also been true to his word in some other ways: GST on retail trade has finally arrived; import duties have been reduced; more taxpayers have been brought into the net; and revenues have grown impressively.
But some bones remain to be picked. The tax structure has not been simplified as promised. The hike in the salaries of government servants is closer to 18% than 50% as earlier claimed. The defence budget has, strictly speaking, not been “capped” at Rs 131 billion as argued – it is actually going to be about Rs 136 billion, or 4% higher, if the proposed increase in defence pensions (Rs 27 billion last year, Rs 32 billion next year) tucked away in the category of “government expenditures” since last year is taken into account. Nor is there much point in crowing about the “low rate of inflation” of under 5% as compared to the target of about 6%, if only because ordinary folk bitterly perceive the cost of living to have risen by much more than that. In any case, a lower than targeted rate of inflation merely suggests that growth has been lower than predicted on account of a fall in business confidence rather than prudent fiscal and monetary management.
Looking ahead, Mr Aziz claims that a tax revenue target of Rs 464 billion next year is quite “realistic” in view of the problems encountered this year. Last year, this target was an overly ambitious Rs 437 billion. This was quickly scaled down to Rs 431 billion in September and Rs 417 billion in March. But actual receipts end-June turned out to be closer to Rs 404 billion, which itself was no mean achievement, considering that the CBR had only managed Rs 356 billion a year earlier and not much less than that in the preceding year. Thus, against a growth of about Rs 50 billion this year, the government is budgeting growth of Rs 60 billion next year. On the face of it, this seems fair enough. But is it?
There is a limit to the amount of taxes that the CBR can extract from people if the economy is not growing fast enough to generate a fair degree of autonomous growth in the revenue base. This year, many people coughed up more money than usual, despite low economic growth, only because the government succeeded in browbeating them in an environment of fear. But a stiff price was paid for doing so – savings and investment fell to their lowest levels for a long time. This means that the same counterproductive strategy will probably be avoided this year. Thus a great deal of reliance will be placed on the results of the income surveys completed earlier in which businessmen were arm-twisted to admit significantly greater turnovers (and therefore potentially greater tax liabilities) than usual. But even this will not suffice to raise revenues by as much as Rs 60 billion, which works out to an increase of about 15% for the second year running, especially if GDP growth is still imprisoned at not much more than 3%.
Mr Aziz also seems optimistic that the IMF and other donor agencies will fork over a great deal of money for balance of payments support and poverty alleviation. But there will be a price for that too. The rupee, which has been effectively devalued by 15% this year, will face continued pressure if the State Bank of Pakistan persists in buying up to US$ 2 billion from the free market to shore up its reserves to IMF standards. This is a sure shot recipe for the continued dollarisation of the economy which must be avoided.
The economy desperately needs a shot in the arm. Mr Shaukat Aziz should persuade the IMF not to keep him under such a tight leash.