Finance minister Ishaq Dar has set some difficult targets in the 1999-2000 budget unveiled June 12. But he claims that his objectives are “optimistic” rather than “over-ambitious”. His “optimism” is based, apparently, on “international signals that the worldwide recession, especially in the SE Asian region, is declining”. We hope and pray he is right. But we fear he may be wrong on the most important counts. Consider.
Contrary to Mr Dar’s assessment of a favourable external trading environment for Pakistan, The Economist Intelligence Unit’s (EIU) review for 1999-2000 forecasts that “world trade growth will remain well below the level of 1997”. In particular, says the EIU, “Pakistan’s top export markets (for textiles, yarn and leather goods) will offer little succour: growth in the US is projected to slow further, while GDP growth in the EU and Japan, though rising, will remain weak”. This means that Mr Dar’s projected 18% increase in exports, in the face of an 11% decrease in 1998-99, is totally misplaced.
Mr Dar also predicts that GDP will grow by 5%. There is one major unspoken assumption behind this figure: that large-scale manufacturing industry will grow by about 5%. But large-scale manufacturing industry grew by only 2% or so in 1998-99 and to expect it to leapfrog to 5% without any fundamental change in the insecure domestic environment is profoundly unrealistic. Foreign and domestic investment is down and business confidence is at rock bottom. It is therefore more realistic to believe that industrial output will grow by no more than 3%, with marginal growth in construction and manufacturing and a slight contraction in utilities. Similarly, one should not expect more than a 3% increase in fixed investment (which fell by 5% in 1998-99). Pakistan’s industrial sector will also face rising costs and the impact of reduced import tariffs will be more than offset by exchange rate depreciation and rising oil and non-oil commodity prices in 2000. Likewise, the agricultural sector targets (in particular cotton and wheat) will remain out of reach for several reasons, such as the vagaries of the weather, poor seed quality, widespread fertiliser and pesticide adulteration and deteriorating irrigation facilities. All this will be coupled with continuing hiccups in the government’s relationship with the IMF, international donors and the United States over economic and foreign policy and is likely to reinforce uncertainty about the country’s stability and direction. Indeed, business confidence in the economy may evaporate altogether if the current military conflict with India escalates into war or is prolonged over any significant period of time. Under the circumstances, Mr Dar would be lucky to get GDP growth of about 3.5% in 1999-2000.
Finally, Mr Dar expects to collect Rs 356 billion in revenues in the next twelve months. This is wishful thinking. For the third year in a row, the government has set a target of over Rs 350 billion. In the last two years, however, the target was progressively revised downwards and actual collection was barely Rs 300 billion in the year. With GDP expected to remain about 3.5% and without any fundamental reform in tax structure or signs of change in tax-paying culture, Mr Dar will be extraordinarily lucky if he can collect Rs 325 billion through various arm-twisting methods and rationalisations. That would push up the fiscal deficit from its targeted Rs 113 billion (3.3% of anticipated GDP, assuming 5% growth) to Rs 144 billion (4.5% of actual GDP, assuming 3.5% growth). And if the usual pattern of financial profligacy characteristic of Nawaz Sharif’s style of governance is manifest again, the fiscal deficit is bound to overshoot 5%.
Let’s face facts. For some years now, the budget exercise has become quite meaningless. Figures are routinely fudged. Targets are inevitably inflated. Reform is predictably postponed. Performance is consistently dismal. The rich refuse to pay up, yet complain of a rapidly deteriorating quality of life. The poor get poorer but are unable to articulate their protest in any radical manner. The middle-classes cannot make ends meet. Income inequality is rising. Poverty alleviation is non-existent. Meanwhile, the country continues to sink into debt and we are increasingly beholden to the international community.
Pakistan needs to grow by at least 8%-10% every year for the next decade or so if living standards for a majority of Pakistanis are to rise appreciably. This is not possible without a radical transformation or restructuring of economy and society. Nor, indeed, is it possible without accountability of all and transparency in everything — accountability of politicians so that revenues are not siphoned off; of businessmen so that taxes are paid in full; of landlords so that unearned income is not unduly rewarded; of civil servants so that inefficiency is reduced. It is also not possible without the independence of the judiciary and sanctity of the rule of law — so that economic contracts and obligations are fairly enforced and economic transactions are transparent.
Such a necessary transformation cannot be accomplished by any amount of budgetary juggling. The health of the economy is now inextricably linked to the health of the political system. Without an overhaul in the latter, there can be no meaningful improvement in the former.