Federal Budget 2018-19

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On April 27, 2018, the PML-NPassword led government rates (Table.1). The government claims that the (at least 6 characters) unfolded the sixth consecutive federal budget of positive growth rate was due mainly to its policy polic y its nearing-the-end tenure – an unprecedented ongoing since Showpast five years and reinforced by happening in the country’s history so far. supportive macroeconomic indicators indicato rs such as low Questions of mandate to do so and constitutional rates, contained inflation, fresh FDI Send me updates from policy Scribd validity of the exercise apart, one expects that a inflows, growth in PSDP spending and added government having ruled the country for almost impetus from CPEC projects. Agriculture sector Sign Up five years, presenting and implementing five has recorded highest growth rate in past 13 years, federal budgets, would be leaving the national stemming from supportive government policies registering a Scribd account, agree to our economy at a take-off stage andBysolid footings, suchyouas agricultural credit expansion, Kissan Terms Service andPackage Privacy Policy giving the nation a confident strategy in theofshape and provision of hybrid and high yield of its last budgetary exercise. Element of varieties of seeds. populism in the last budget presented by any Already in government is usually a constant, too. In have anyan account? TableSign 1. Growth Rates Recorded in Different Sectors economy, nonetheless, the main questions to analyse a budgetary exercise are: to what extent does it address the core economic issues of the Sector Growth Rate country; what it provides for to consolidate the Agriculture Sector 3.81% gains, if any, achieved so far and address the Industrial Sector 5.80% economic and social imbalances, and more Service Sector 6.43% importantly what is there in it for the flourishment flourish ment Source: Pakistan Economic Survey, 2017-18. of economic / business activity. Underprivileged segments of society would always be looking for One of the notable features of the progress of the some relief and social safety provisions. It is in incumbent government is that visible strides have this background that the following review been made to overcome the energy shortages of attempts to have a look at the federal budget for the country. Installed capacity of electricity 2018-19, starting with a glimpse of prevailing generation has reached 29,573MW, registering economic situation and the outlook. 30% growth since FY 2013-14. The per capita income has increased to PKR 180,204 compared I. ECONOMIC OUTLOOK to PKR129,000 in 2013. The average inflation from July-March FY 2018 was recorded at 3.78% There indeed are some positive developments compared to 4.08% in the same period last year. to note with Pakistan economy and the same goes Net FDI inflows have also registered slight for the outgoing fiscal year, 2017-18. GDP growth of 4.4%, reaching US$2.1 billion against continued to register positive growth, recording US$2 billion in the same period last year. This 5.79% in the FY 2017-18 (provisional estimates) growth in FDI came from China, Malaysia and as against 5.4% (revised) of 2016-17. All major UK, with an exponential increase made mad e by CPEC. sectors of the economy registered positive growth [1]


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Apart from the positive indicators given above, functionaries involved, management failure to the overall economic, financial and social sector regulatory barriers have locked the potential of Sign Up With Facebook  situation in the country remains far from desired. growth. For the year 2018, the ease of doing National savings fell to 11.5% of GDP, compared business in Pakistan stood at a dismal 147th 2 Google to 12% in the FY 17-18, widening theSign gapUp With position. Pakistan’s informal economy is between savings and investment to 5% of GDP. considered to be of a huge size, estimated in 2012 or with email to be at least double of the formal economy in In a long list of vulnerabilities facing Pakistan’s economy, the external account Name is in real crisis. size.3 The foreign exchange reserves are dwindling at a rapid rate due to the burgeoning current account Informal businesses stay largely underutilised deficit. High imports accompanied by slowly given their inability to do business with larger Email picking exports have sharply deteriorated the firms or market their products at international Balance of Payment (BOP) position. Imports level. The informal capital thus languishes as have registered 15.7% growth during July-March dead capital. De Soto, the famous Peruvian FY2018, reaching $44.3 billionPassword whereas exports economist, asserts that a strong market economy least 6 characters) amounted to only $17.1 billion,(atthough growing can never exist in absence of an adequate by 13.1% in the same period. Remittances have frameworkShow that records economic information been recorded at US$14.6 billion in the same and ownership of property.4 Whereas Pakistan period, registering 3.6% growth. This has led to still relies on a very outdated and complex tax Send me updates from Scribd widening of current account deficit by 50.5%, collection system. amounting to US$12.03 billion. Whereas, public debt of the country has emerged to the tune of Speaking of another fundamental pillar of Sign Up PKR 23,608 billion (at the end of Feb,2018), economy i.e. human resource capital, capital , is in a talent witnessing growth of PKR 22,00Bybillion (out of account, crisis due toto registering a Scribd you agree our the negligible investment in which the share of increase in gross domestic d ebt andeducation as well as outdated educational system. Terms of debt Service Privacy Policy was PKR 1093 billion and external debt was 1107 The country has been ranked as one of the worst billion) during the first eight months of current performing nations as per the “Human Capital Already have an account? in . 5 fiscal year. The debt to GDP ratio has reached ReportSign 2017” 70.1% which is way ahead of the 60% ceiling set by law.1 With the current pattern of debt The overall handling of the economy by incumbent government looks satisfactory and accumulation and declining reserves, Pakistan’s ability to withstand its external shocks has been several achievements since 2013 are appreciable, seriously compromised. leading the journey of GDP growth from merely 3% in 2013 to the existing 5.8%. Nevertheless, The country has long been hobbled by b y high levels the existing path of inertial development offers of debt due to low investment and low tax but little prospects to the economic woes of the collection. Debt oriented growth does not offer a country. sustainable source for supporting public services. BUDGET AT A GLANCE Additionally, the subsequent high mark-up II. payment leaves little revenues for public The government unveiled the 6th and last budget expenditure. of its tenure amid strong voices of disapproval from the opposition benches. As anticipated, the Multiple institutional bottlenecks ranging from budget was a popular one due to upcoming issues with property rights, corruption of elections, where current expenditures increased at 1

Fiscal Responsibilities and Debt Limitation Act, 2005. “Ease of Doing Business Index”, World Bank. (2017). 3 Kemal, M. Ali, and Ahmed Waqar Qasim. "Precise estimates of the unrecorded economy." The Pakistan Development Review (2012): 505-516. 4 De Soto, Hernando. The mystery of capital: Why capitalism triumphs in the West and fails everywhere else . Basic Civitas Books, 2000. 5 Ziauddin, M. "Human Capital Report 2017." (2017). 2

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the cost of development expenditures. On the up to 5.8% of GDP compared to 4.6% in the expenditure front, the budget is loaded with preceding year, upsetting the persistent declining Sign Up With Facebook  generous provisions for government employees trend. with increase in salaries, pensions and house Sign Up With rents, as well as increase in allocations for regular As Google per the current budget, the revenuestipends given to some 6 million recipients under expenditure gap stands at PKR 1,890.2 billion, or with email Benazir Income Support Programme (BISP). amounting to 4.9% of the GDP. The deficit Incentives have been given for several would be met through gross external loans of Name sectors of the economy. On the revenue side, notable PKR 1,118 billion, adding further into existing changes have been made into the prevailing tax debt stock of PKR 23,608 billion. This time the regime with increasing of the minimum heavy reliance of government on loans from Email thresholds for tax deductions as well as tax commercial banks for plugging the deficit is relaxations for multiple sectors. somewhat worth noticing. Nevertheless, the budget seemsPassword hastily crafted least 6 characters) without realistic adherence to (at revenue sources. Below is a brief look at the budgetary provisions for 2018-19.

Out of the total of PKR 1890.2 billion, PKR 1548.1 billion will be net domestic financing and PKR 342.1 bn net external financing.. This Show inordinate reliance on banking system for bridging the deficit will gravely impact the Send me updates from Scribd A- REVENUE, EXPENDITURE AND monetary and financial stability. With the FISCAL DEFICIT. prospects of o f earning earnin g risk free return by means of financing to government, banks reluctantly Sign Up The Budget revenue for the FY 2018-19 has been indulge in risky ventures thus hurting private estimated at PKR 3070.4 billion compared to the investors and ultimately the economic growth in By registering a Scribd account, you agree to our federal expenditures of PKR 5932.5 billion. The andthe country. Terms of Service Privacy Policy revenue shortfall has emerged to the tune of PKR 2.17 trillion, which has been reduced to PKR 1.89 Additionally, the estimated budget deficit of 4.9% trillion. after the adjustment for provincial surplus Already have an account? in probability. Current expenditure is is butSign a rare of PKR 285.6 billion. very likely to exceed the estimated allocations. Furthermore, the provincial surplus estimated at Fig.1 Revenue-Expenditure Gap PKR 285 billion is very unlikely to happen. Presenting a rosy picture at the time of budget Revenue-Expenditure Gap presentation has become a sad tradition where 25 governments conveniently hoodwink the masses by presenting presen ting miscalculated miscalc ulated figures on estimated 20 expenditure, deflating budget deficit. Budget Fiscal Deficit deficit in FY 2017 surpassed its set target of 4.1% 15 reaching 5.8% of GDP. The overestimation of resources and underestimation of expenditures 10 this year will once again have a direct bearing on fiscal deficit. 5 0 8 0 0 2

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Current expenditure has been budgeted at PKR 4780.3 billion compared to the revised estimates of PKR 4298.2 billion in the outgoing fiscal year. The allocation of appropriations to different components categorised under current expenditure can be seen in Fig.3.

Tota To tall Re Reve venu nue e

Source: Pakistan Economic Survey, 2017-18.

Fig.1 shows a narrowing trend line of fiscal deficit over the passage of time. However, in the outgoing fiscal year, the deficit once again rose [3]


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Fig.3 Current Expenditure

Public debt in Pakistan has swelled to a whopping PKR 23.6 trillion. Per capita debt stands at Facebook  Sign Up Withapproximately PKR 115,000, owing to the reckless piling up of public debt. Interest Payments Sign Up With Google After mark-up payments, the largest outlay has 12% Pension or with email been earmarked for Defence, which has increased by 10.11%, accounting for 23% of current Name 34% 10% Defense expenditure. This is the first prominent 4% percentage increase in defence budget bud get during the Grants & Transfers tenure of the incumbent government (as can be 10% Email seen in Fig.5). The percentage change in defence 7% Subsidies budget continuously continuousl y declined except for the 23% current FY where it has hiked by almost 10 Running of Civil percentage points. Though Thou gh the appropriations for Password Government (at least 6 characters) defence have been continuously rising, however its share inShow current expenditure almost stayed the same. Source: Budget in Brief, MOF (2018-19). Send me updates from Scribd Fig.5 Pattern of Defence Expenditure Major chunk of the budget has been earmarked for Mark-up Payment, amounting to 34% of Sign Up30 current expenditure. The Mark-up payment has increased by 6% over revised estimates the account, 25 you agree to our By registeringof a Scribd Termsof ofPKR Service and Privacy Policy outgoing fiscal year. Whereas, a total sum 24.4 23 22.4 22.3 2221.9 billion will be spent on debt servicing 20 which includes PKR 229.2 billion of foreign debt Already have 15 Sign in servicing, PKR 601.7 billion of foreign loanan account? payments and PKR 1391 billion of Domestic debt 19.6 10 servicing. Fig.4 depicts the continuous growth in 16.27 the mark-up payment with every subsequent year. 5

Fig 4 Mark-up Payment 0 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Interest Payment (Billion Rs) Perc Pe rcen enta tage ge of C. C.E E 2018-19

Perc Pe rcen enta tage ge ch chan ange ge

1620.23

2017-18

Source: Budget in Brief, MOF.

1526.2

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The sharpest increase in expenditure this time can be observed in the case of foreign loan repayments, which has sprung up by 40.5%, followed by subsidies which has grown by b y 18.3%. Pensions and Grants have grown by merely 2.5% and 3.5%, respectively. Fig.6 shows the overall percentage change in allocations to different sectors.

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Fig. 6 Percentage Change in Current Expenditure

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shortlisted by HEC for setting up 9 labs aimed at carrying out research in this area. Sign Up With Facebook

Percentage Change (from Previous Budget) 4.08 2.6 7.36 -4.4 7.2 10.11 -5

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Health sector paint a very sorry state of affairs. Sign Up With Google Outlay for Health has increased by 7.36%. SOCIAL PROTECTION Nevertheless, its share in budget is almost ENVIRONMENT PROTECTION or with email negligible, standing at 0.29% of current HEALTH expenditure. In terms of GDP, expenditures on Name HOUSING health stand at less than 1%. Whereas, WHO strongly recommends spending of at least 5% of EDUCATION GDP on health.6 The public-sector health DEFENSE Email facilities do not only operate in a very ver y poorly way but also lack modern technologies and latest 15 surgical equipment.

Password Source: Budget in Brief, MOF (2018-19).

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Outlay for Subsidies has increased by 18.38%. The increase in the subsidy budget is highest Outlay for Education has increased by 7.2%. Show since the present government took over in 2013. However, overall (national and provincial) Overall, allocations for subsidies stands at 0.5% appropriations for education in Pakistan still Send me updates from Scribd of GDP. Subsidies to WAPDA/PEPCO takes the hovers around 2.2% of the GDP, which is lion’s share of the allocation, standing at 76.7%, tremendously low. Fig.7 shows overall spending followed by subsidies to PASSCO and KESC, on education sector. Bulk of expenditures are Sign Up with their respective shares at 10.9% and 8.8%. consumed by tertiary education. The share of prePKRyou 2 agree billion has been exclusively exclusivel y earmarked for primary and primary education By services registeringstands a Scribd account, to our Package, and another 1 billion has been Terms of Service Privacy Policy merely at 10.3%. With 25 million children out of and Ramzan allocated for subsidized provision for major food school, this sector is woefully underfunded. commodities such as Pulses, Tea and Rice which Already have an account? Sign in will help in alleviating impact of altogether Fig.7 Education Expenditure inflation on citizens. Additionally, a sum of PKR 2.5 billion subsidies has been allocated for boosting the exports of wheat and sugar, aimed at Pre primary and Primary enhancing the competitiveness of these two major Secondary export products. Education

Tertiary Education

C- DEVELOPMENT EXPENDITURE

Education Services not defined by level

A total sum of PKR 1152.1 billion has been earmarked for development expenditure, out of which share of federal PSDP stands at PKR 800 billion compared to PKR 1 trillion in the outgoing fiscal year. For the first time, the share of development expenditure has been slashed by the current government. The allocations to development expenditure expenditur e were cut by 21.9% from the outgoing fiscal year’s actual estimates. Fig.8 shows the actual estimates of development expenditure, allocated under present government.

Subsidiary services to Education Administration Miscellaneous

Source: Budget in Brief, MOF (2018-19).

PKR 1.1 billion has been exclusively allocated for Artificial Intelligence projects. These projects will be carried out under HEC supervision. In this regard six public sector universities have been 6

World Health Organization. World health report 2000. Health systems: improving performance. Geneva: WHO; 2000.p.73-90.

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Sign up to download Federal Budget 2018-19 Fig.8 Development Expenditure

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announcement, these allocations for the water sector seem timely and are appreciable. Sign Up With Facebook

Pattern of Development Expenditure

Allocation to Pak SDG and Community With Google Development Programme has been slashed from 1400 PKR 30 billion to 5 billion. Again, for the very 30 or with email 1200 first time, PKR 10 billion has been allocated for 25 start of ten year FATA Development Plan. At the Name 1000 20 same time, the government has completely 800 15 abolished the allocations for the PM programs 600 under the heads ‘Energy for All’ and ‘Clean 10 400 Email Drinking Water for All.’ The timing of 5 200 abolishing these allocations at a time when the 0 0 country has been ranked at 80 among 122 nations 2013-142014-152015-162016-172017-182018-19 regarding drinking water quality7, and where Password characters) 1/3rd of the population still have no access to Development Expenditure(at (In least Billion6 Rs) energy8, is Show really ironic. Besides, no-utilization of As Percentage of Total Expenditure such and other heads in PSDP for the outgoing year gives an impression that such allocations are Source: Budget in Brief, MOF. Send me updates from Scribd earmarked only to provide the policy makers and financial managers with the fiscal cushion to Out of the total 1235 schemes under PSDP 2018 balance the sheets towards the end of the year, as Sign Up 19, 726 are ongoing and 509 are new schemes. A has been the case with past several years. total sum of PKR 575 billion (62% of Development expenditure) has been allocated for account, you agree to our By registering a Scribd TAXES Terms of have Service andDPrivacy Policy infrastructure projects. PKR 458 billion been allocated for the 44 ministries and divisions. Tax revenues have been estimated at PKR 4888.6 As has been the case of past few years, a major billion, which is 17.8 % higher than the revised have an account? Sign in chunk of the budget will be consumed Already by projects estimates of 2017-18. Out of this, FBR taxes related to CPEC, mainly taken up by National account for PKR 4435 billion, whereas other Highway Authority and WAPDA. Some of these taxes stand at PKR 453.6 billion. This year, includes projects for development of Gwadar, notable changes have been made into the modernising of ML-1 phase 1 of Pakistan prevailing tax regime. Minimum thresholds for Railways, construction of M3 section of Karachitax deductions on payments of goods and services Lahore motorway and Sukkur-Multan section of has been raised by 200%. Tax relaxations for CPEC eastern route, completion of western route multiple sectors have been announced. Tax from Burhan to DI Khan, construction of exemptions limit has been reduced by 3 times, Karakoram Highway Phase 2 and Eastbay from 4 lacs per year to 12 lacs. Fig.9 shows the Expressway, land acquisition of the Sukkur percentage growth in different di fferent taxes this year. Hyderabad as well as Islamabad-Raikot section of CPEC. 1600

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Few notable developments under PSDP include allocations to Water Resource Division which has sprung up by 114%, from PKR 36.7 billion to 79 billion. In the backdrop of the National Water Policy approved by the Council of Common Interest (CII) few days before the budget’s

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Azizullah, Azizullah, Muhammad Nasir Khan Khattak, Peter Richter, and Donat-Peter Häder. "Water pollution in P akistan and its impact on public health — a review." Environment International 37, no. 2 (2011): 479-497. 8 Planning Commission. "Pakistan Vision 2025." (2015). [6]

Sign up to download Federal Budget 2018-19 Fig.9 Percentage Change in Taxes

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Fig.11 Direct Vs Indirect Taxes

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Percentage Change in Taxes

Taxes

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Source: Budget in Brief, MOF (2018-19).

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As a positive move for the large scale business The tax base in Pakistan has witnessed growth in activities, corporate sector taxes have been Send me updates the past couple of years. Yet, Pakistan’s tax to from Scribd slashed by 1% for FY 2018-19. In addition to this GDP ratio remains one of the lowest even by corporate taxes will be reduced by 1% annually regional, the South-Asian standards. For the FY till 2023, with a target of taking it to 25% from Sign Up 19, the tax to GDP ratio has been estimated at the existing 30%. The government has also 13.8% of GDP compared to the 13.2% in the announced the By registering a Scribd account, you agree to ourgradual retirement of Super tax outgoing year. Fig.10 shows the pattern of growth Terms of Service and(which Privacy Policy was levied in 2015 for financing in Tax to GDP ratio since 2010. rehabilitation of internally displaced people). For promoting exports, custom duty on raw Fig.10 Tax to GDP Ratio Already have an account? Sign have in materials been withdrawn. Mark up rates of Long Term Finance Facility (LTFF) and Export Tax to GDP Ratio Refinance Facility (ERF) has been reduced over past years to 5% and 3% respectively and this has 13.8 been kept at the same low lo w level for 2018-19 201 8-19 too. too . 12.6 12.9 13.2 Whereas five major export sectors have been put 11 9.9 9.3 10.2 9.8 10.2 in zero-rated sales tax regime. However, no significant reforms have been announced for tackling structural issues pertaining to the taxation. Not only the tax net needs to be expanded rather the reliance over indirect taxes should also be lessened.

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Tax to GDP Ratio

Source: Pakistan Economic Survey, 2017-18.

III. CONCLUSION Despite increase in tax revenues, there is still unrelenting reliance on indirect taxes as FBR envisage 60.8% of revenues to come from Indirect taxes. Again, the growth in indirect taxes is 2.8% higher than the growth rate in direct taxes. A cursory look at indirect taxes shows that sales taxes has recorded growth rate of 9.8% whereas excise taxes has increased by 17.7%. Fig 11 shows the overall ratio of direct Vs indirect taxes in the tax base since FY 2010-11.

Based on above analysis, it can be concluded that the budget is largely a continuation of past pattern of balancing-the-sheets in terms of resource and expenditure projections. It does not offer any meaningful sustained institutional and structural reforms for either plugging the macro-economic imbalances or expanding the tax base. The country needs to urgently devise and put to implementation a strategy ending the reliance on [7]


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to say – of what is allocated. That goes for all ‘accumulating debt to pay debt’ approach and start the journey towards self-reliance. That other allocations as well. Social safety nets and Sign Up With Facebook  begins with a meaningful and equitable increase in pensions should aim beyond dolling broadening of the tax base; making every out paltry amounts periodically and instead Sign Up With Google individual and sector pay as much as they owe. making the beneficiaries stand on their own feet. Unfortunately, despite having ruled for almost or with A balance between large-scale communications five years the outgoing government was unable to ’ email infrastructure and less attendedName social sectors – come up with any path-breaking, trend-0setting education and health – needs to be ensured. In budget and opted for the th e easier to do approach. appro ach. terms of defence expenditure, it goes without saying that the real threats and challenges faced The budget, as a whole, is devoid of any Email by the country should be kept k ept in view and at the th e meaningful strategy to put the national same time it is also imperative to make the economy’s house really in order. optimal utilization – enhancing enhancing the efficiency, so Password


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Prepared by IPS Task Force

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For queries: Nadeem Farhat, Senior Research Coordinator, [email protected]

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www.ips.org.pk

Federal Budget 2018-19

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