The government of General Pervez Musharraf has presented its first budget after claiming that it has pruned defence allocations for 2000-2001 by nearly Rs 10 billion. The government has also announced that it will not respond to India’s latest Prithvi testing. It has abolished wealth tax, given an annual bonus of Rs 2,000 to state-sector employees in the pay scale 1 to 16, allowed 80 percent reduction in income tax for people earning Rs 60,000 annually and staggered this reduction upwards till those who earn Rs 15,000 will get 50 percent reduction. The government has increased the share of the provinces in the federal divisible pool by 28 percent, subjected the assessment of presumptive taxation to advice from traders’ committees, pledged to make export-related refunds within one month and clear the outstanding Rs 10 billion refunds by end June. The budget has allocated Rs 21 billion for poverty alleviation and Rs 120 billion for the Annual Development Programme. It has reset the tax revenue target at Rs 351 billion, a whopping increase of nearly Rs 80 billion over the current year’s revised target. Federal taxes have been cut down to three and provincial taxes from 30 to only nine.
Critics say the government will find it difficult to meet its targets. The cut in the defence budget in real terms comes to much less if one factors in the low inflation rate at 4 percent, compared to the past around 10-12 percent, and if one accounts for the approximately Rs 26 billion transferred to the government’s expenditures side. In real terms therefore the defence budget may have gone up by 14 percent in monetary terms, testifying to a covert arms race with India. Experts continue to be sceptical about the ability of the government to revamp the taxation bureaucracy which will collect the sum of Rs 351 billion. If the growth rate is excepted to be no more than 4.5 percent, the additional collection will not be based on growth but on arm-twisting, which in itself is a heroic assumption considering the fact that the ground reality of corruption has not changed. Failure to collect an additional Rs 80 billion under low growth will cause the IMF to drag its feet and undermine the budget assumption of receiving Rs 178 billion from external sources. This large sum from the IMF, the ADB and Pakistan Development Forum is still conditional to Pakistan making fundamental foreign policy decisions which are nowhere in sight. The second round of debt-rescheduling in January 2001 is hardly certain, given the current submissive stance of the government to internal pressures.
Significantly, the government has slapped up to 70 paisa surcharge on diesel, kicking up transportation costs and the general price index. Add to that the expected hike in gas rates and the costs picture becomes more gloomy. It has increased the withholding tax by 1.5 percent, cut the profit on saving schemes also by 1.5 percent, and extended sales tax to the services sector. The economy may not respond to this positively and exports may actually decline, the boom in the textile sector may not repeat itself and the budget’s reliance on agriculture for growth may be misplaced. Given Pakistan’s very low foreign exchange reserves, crucial imports may come under pressure too. A general curtailment in the purchasing power of the population in the face of high costs and curtailment of savings will certainly affect revenue collection despite documentation. After the Budget refuses to balance, poverty alleviation and development programmes will surely be axed.
It will need a different Pakistan to execute the new budget. People are willing to respond to the amnesty scheme after sensing that the government has resolve. Shopkeepers hiding their stocks want the amnesty to be increased and extended beyond June to make their stocks “white”. The next step will be to effectively stop the influx of smuggled goods and meet the challenge of confronting powerful vested interests behind the racket. Unfortunately, the dispute with HUBCO has not been resolved so far, and WAPDA is bound to come under more pressure after the stoppage of subsidy to it. The HUBCO issue is a hurdle in the path of foreign investment and is still firmly in place. And it will require many more internal improvements, inclusive of law and order and the judiciary, to restore the investment climate in Pakistan.
Budget 2000-2001 is asking Pakistan to change its ways. The proverbial bullet was never really bitten in the past and the state was forced to nuclearise itself without having the flexibility of response needed to face off punitive global pressures. What we need is a strong government. There are many elements in our society who have enjoyed the bounties of a mal-functioning and “fudged” economy in the past and would now like to test General Musharraf’s resolve. Unfortunately, some ground has been ceded to these elements in the past months. More bending in the face of these people will adversely affect the enforcement of the new budget and damage the confidence of Pakistan’s foreign creditors without whose political support the economy can go into a payments default next year.