x Abu Dhabi, UAEWednesday 24 January 2018

Vast debt highlights Pakistan's budget

Pakistan's budget reflects damaging effects of devastating floods, rising costs of security, and spiraling oil prices on economy.

ISLAMABAD //The Pakistani finance minister, Hafeez Sheikh, yesterday presented a budget reflective of a government without the resources to make ends meet and with no choice but to pass on the burden to consumers, half of who live beneath the poverty line.

The bulk of the budget for the fiscal year 2011 to 2012 would be spent on security and servicing public debt, leaving relatively little left for the general population.

Together, defence and security expenditure is forecast to rise by 15 per cent to 835 billion rupees (Dh35.7bn), most of it going toward counterterrorist operations and the modernisation of the military.

"We stand by our valiant men, who are laying down their lives to safeguard our country," finance minister Abdul Hafeez Shaikh told parliament. There has been speculation that the government is preparing for an operation against militants in the tribal region of North Waziristan

The budget comes after an annual government survey on Thursday highlighted an economy in trouble. The survey said growth had been hit by devastating floods in August, the rising cost of its war with militants, acute electricity and natural gas shortages, uncertain flows of foreign assistance, and spiralling international oil prices.

The 2,767bn-rupee budget, about 14.2 per cent higher than 2010 to 2011, predicted a reduction in deficit to 850bn rupees or 4 per cent. Estimates for last year put the deficit at 5.1 per cent although the government warned it could spiral to eight per cent, prompting it to make drastic last-quarter cuts in development spending.

Some 786bn rupees has been earmarked for servicing Pakistan's vast debt, an 8 per cent increase on the previous year. Small by comparison, spending on development has been set at 300bn rupees.

That does not include the 430bn rupees that would be spent by the country's four provincial governments, under new constitutional arrangements. The combined development spending of 730bn rupees is 58 per cent higher than expenditures in the current fiscal year.

For the last two years, however, budgeted development spending has been slashed to bridge gaps in government finance.

The budget presented by Mr Sheikh assumed a rise of 28 per cent in revenue collection to 1,952 billion rupees, based on the removal of most tax exemptions, particularly wholesale and retail exemptions.

The reform of general sales taxes is a key condition of a US$11.1bn (Dh40.8bn) standby loan facility with the International Monetary Fund (IMF), which was suspended in April 2010 because of the slow pace of fiscal reform by Pakistan's government.

Parliamentary approval of the tax reform is expected to trigger the release of $3bn withheld by the IMF since last year.

The budget bill has to be approved by parliament within June to take effect from the new fiscal year on July 1.

However, there was little else in the budget to suggest the government is seeking to significantly broaden its very narrow taxation base, which includes just 2.9 million registered tax payers out of a population of about 170 billion.

Economic analysts criticised the reform, saying the increase in indirect levies failed to address the structural problems with Pakistan's taxation system.

"We need to change our revenue collection structure if it is to be improved," said Tariq Iqbal Khan, former chairman of National Investment Trust, Pakistan's largest mutual fund.

In Thursday's government survey, economic growth was estimated at just 2.4 per cent, against the modest target of 4.5 per cent set by the government for the fiscal year 2010-2011. Pakistan's economy grew by 3.8 per cent the previous fiscal year.

It said the economic slowdown has been compounded by high consumer price inflation, which topped 14 per cent.

The budget would take effect from July 1, the start of Pakistan's financial calendar.