New budget — new wizardry? (I)


Pakistan’s annual budget is more of a political event than a national endeavour for some betterment. This has been the case since 1952 when we were first forced to go to the IMF. Since had taken loan from the IMF for the first time and ever since – we have become accustomed to begging. We have now chalked up 26 loans from the International Monetary Fund.
Nevertheless, the nation is eagerly looking forward to the incoming budget as it is the most important economic policy document for a country, affecting the lives of every Pakistani.
Let us wait and observe the skills of the new financial team as they try and get these stringent IMF conditions relaxed.
Unfortunately, Pakistan had already made commitment to the Fund to increase FBR taxes by a massive Rs1.272 trillion (almost 2.8 per cent of GDP) in the coming budget 2021 and raise electricity rates by almost Rs4.97 per unit in the remaining three months of this year.
The former Finance minister, Hafeez Sheikh, gave an undertaking to continue making electricity tariff adjustments this year on monthly, quarterly and annual basis by 36 percent increase and imposition of new taxes equal to minimum 1.2 percent of GDP or Rs570 billion in the new budget. Now let us see what success the FBR has achieved? And what are the tax collection project figures for the next year?
FBR collects 10-15 percent of taxes every year. Yet the IMF wants us to increase the tax net to 30 percent, which is unrealistic will crush the common man. The government has also agreed to bring down the current year’s development programme to Rs1.169tr against budgeted target of Rs1.324tr; the indirect taxes committed to be increased from Rs1000 billion to Rs1300 billion which would exacerbate growing inequality. If realised, this will trigger further price hikes and indirect taxes will start taking a toll on the ordinary people. Imposing invisible indirect taxes through manipulation of statistical data is akin to cosmetic-surgery – giving the appearance of an ‘Awami’ budget. The government should avoid fudging the books and must announce withdrawing control of Statistics division from the Planning ministry. It should be placed under the Council of Common Interests to allow autonomy in terms of data collection and analysis. The government has also made a commitment with IMF to not consider any tax exemption or tax amnesty in gas tariffs in future. All of these taxes and increased tariffs will lead to price hike. The present Finance Minister has to be a hard negotiator with the IMF to get the maximum relief and we must renegotiate the terms of repayment with World Bank and try to have secure deferrals in light of the ongoing pandemic.
As a political worker, I condemn the IMF for forcing Pakistan to increase the electricity tariff. This is a grave “injustice” as the price hike has already crippled our economy and increased corruption. The current IMF programme is a difficult one and such conditions also incur political costs. Pakistan doesn’t currently have the capacity to raise its tariffs or taxes under the Fund scheme – hence we have to renegotiate the terms with the IMF. Tariff increase is not the only way to increase revenue.
I will also have to warn the government and lawmakers of the dire consequences that will be suffered over the next four years if the incumbent government is not able to take GDP growth to 5 percent. Even the man that the PTI had presented as its ‘financial wizard’ – Asad Umar – stepped down from the cabinet when he returned from Washington after negotiating a deal with the IMF. The decision left many feeling dismayed, since immediately after assuming power, the PTI pressed the panic button on the economy. The impression that PTI had given to Pakistan and to the rest of the world was that Mr Umar was the man to fix things. This image was tarnished badly. Under his short nine-month tenure as Finance Minister, the growth rate had fallen by 2 percent, inflation had already hit close to 10 ten percent, gas prices had jumped up by over 40 percent and the Pakistani currency was constantly depreciating. Despite giving such a heavy financial blow to the economy, Asad Umar could not carry on with IMF deal as he said himself that he didn’t want to tell the country what the IMF thought should happen to the rupee. They envisaged inflation at 19 percent and the discount rate was supposed to go to 21 to 22 per cent. Now that deal has already been struck with the IMF through another Finance minister, one can imagine the stern conditions that IMF might have attached.
Pakistan’s external debt servicing will remain over $10 billion a year for the next two years.
According to research conducted by IRR Pakistan, if we want to get rid of the IMF and its stringent conditions – we will need to follow the example set by Turkey as it stabilised its economy and escaped the IMF debt trap. Recep Tayyip Erdogan became prime minister when Turkey was a country that suffered from constant economic blows despite the fact that the rest of the world was doing fine economically. Now Turkey is thriving and its economy is still growing while the world is suffering the long-term effects of the 2008 economic crisis.

During both his premiership and presidency, Erdogan increased Turkey’s GDP some 9-fold while that of neighbouring Greece remained almost stagnant. Over the last 15 years, Turkey has become home to a formidable manufacturing industry. Both president Gul and then PM and now the president played pivotal role and brought new model of governance by bringing back the presidential system where president Gul formed his own party.
In his first year of Govt, in 2001 he ended “State of Emergency” (Olaganustu Hal) in east of Turkey. This increased the investments to the east, inflation rate decreased to around 7-10 percent that decreased interest rates and this boosted consumption in all manners and credit cards and consumer loans became available for the masses. Long term credits became available like mortgage and mortgage system became available after 2005-2006 and this helped people to build better houses, accumulations in treasury (dollar, gold) increased by 4 times. Long term international credits became available as before Erdogan, Turkey was craving IMF for 1-2 billion dollars with high interest rates. Today, Turkey can borrow money with payment over a generous 30 years. IMF offered 40 billion dollars in 2011 but Turkey rejected it.
In Pakistan, with 14 percent inflation rate, there is a 30 percent rise in poverty, with 80.5 million people hovering just above the poverty line.
Following are the steps required to revive the economy:
Renegotiations with the IMF are needed. The government should focus on revising targets.
There should be a target for a 1 percent decrease in the budget deficit. The target for a growth rate of 18-20 percent of FBR revenues.
There should be an increase in the development budget and development spending should be raised by 20 percent.
It is important for the Finance Minister to do something on the expenditure side as money should not only be released rather it should be spent somewhere, which requires capacity building.
There should be a visible focus of spending on the projects which actually generate revenue, just not on useless things like “langar khanas and Tiger or Panda Forces”.
The federal government should not spend on provincial projects as these should be a provincial matter.
Debt to the private sector should be increased.
The budget strategy is overlooking private investment without which the high targets of job creation cannot be attained.
The tax administration should be free from political influence like in the US and other developed countries, and for that, the autonomy for tax body should be considered. There is no harm in copying the Bangladesh model which was able to increase the growth rate above 9 percent in 2019 and decreased inflation to 5.59 percent with a very slight and negligible increase to 5.65 percent in 2020 despite dealing with a pandemic.
The budget for Ehsaas/BISP programme needs to needs to be enhanced, doubled at least. Small industries programmes like adopted in the Philippines and which focus on self-employment should be replicated here.
The government should focus on privatisation agenda for state-owned enterprises that are not well managed by the government, while ensuring transparency. In the long term, a sharp focus should be on investment on healthcare and education which are most ignored sectors in our country. The crippled health sector has been fully exposed during the pandemic.
Feasible suggestions:
1. The salaries of the government servants should be increased by 25 – 75 percent.
2. Government should announce a special package for the private/daily wages employees for enhancement of their salaries by their employers.
3. Government should allocate special funds for self-employment business opportunities enabling those who have lost their jobs due to COVID-19, to get start their own small business.
4. Government should allocate at least Rs.150billion for construction of temporary hospitals for treatment of COVID-19 patients and for purchase of medical equipment, protective kits (PPEs) for doctors, paramedical staff, army, rangers, police and other law enforcement agencies who are giving duty on the front line during COVID-19.
5. The salaries of the medical and Para-medical staff should be enhanced up to 75 percent.
6. The salaries of the media worker be enhanced by 50 percent.
6. Government has allocated only Rs.100billion under Corona Stimulus Package for fertiliser subsidy, loan remissions and other relief to the farmers, which may be enhanced to Rs.100 billion.
7. A Special Tax Relief Package should be given for agriculture i.e. wheat crops and livestock, dairy farming etc. to provide relieve to small farmers.
Our future lies in agriculture and hence farmers should be supported with good economic packages as incentive to increase the yield and to modernise the agriculture farming
8. Government should allocate more funds for management of rain water reservoirs in every Distt as national water conversionary program.
9. Special funds should also be allocated for construction of new small/mini dams in every dist. like China.
10. Government should enhance the budgetary allocation for on-line education development programme through IT/Internet access, especially in remote areas.
11. The budgetary allocation of Higher Education Commission (HEC) should be enhanced to Rs.100 billion.
12. Government should allocate funds for improvement in the aviation sector and to upgrade airports all over the country.
we need to revive our national airline
It seems to me that the current budget is nothing but an other annual exercise on fudged statistical figures just to complete the usual budget formalities. The government has no vision to steer the country out of these economic crises. Thus, the government has been unable to decide the amicable course to control the pandemic. This fact will likely be reflected in the budget as there has been no talk of extra budgetary provisions for health sector allocated to control Covid-19 which is the real issue of today. Moreover, the budget is likely to fail to provide some handsome allocations to the health, poverty elevation and education sector.
The shrieking announcements of great economic achievements in terms of higher growth rate and lowering of inflation figures will automatically be muted with the four weeks of implementation of new budget.
Let us hope and pray that we get rid of IMF which is eroding our system as we inch towards bankruptcy.
The government needs to take note of the observation of the Chief Justice Pakistan where he observed that the salaries of government servants are being paid through IMF loans which means we are running our administration on IMF ‘handouts’. Whatever next?

The writer is a former Interior minister, author of five books, Chairman Institute of Research and Reforms (IRR) Islamabad. He tweets @Senrehmanmalik