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Tuesday, June 18, 2013

A budget with a road map 

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Dr Ashfaque H Khan

he finance minister, Senator Ishaq Dar, presented the first budget of the newly elected government onJune 12, 2013. The budget has attracted mixed reactions, which was expected. Some are of the opinionthat Budget 2013-14 is a realistic and investor-friendly budget. Others have termed the budget as anti-people and anti-business. This budget is a challenging one, prepared against the backdrop of seriouseconomic difficulties in a limited time.Budget 2013-14 has been prepared in an inhospitable economic environment – both domestically as wellas externally. The domestic environment is largely the creation of the previous regime. In fact, there isgeneral consensus within and outside the country that the economy of Pakistan has never been in such abad shape as it is now. Budget 2013-14 was expected to address such multidimensional challenges. Was itpossible to do wonders in a week’s time? The answer is obviously no. his budget is expected to address some immediate challenges, for example, the issue of circular debt and

power sector management but at the same time, it provides a road map for the medium-term. One maydisagree with the ambitious targets set for the key macroeconomic variables over the next three years butat least there is a vision and there is hope, as well as a glimpse of the priorities set by the newgovernment. The medium-term macroeconomic targets are always rolling in nature and these will be fine-tuned as we move forward.It is against this background that I consider Budget 2013-14 as a challenging one. Prepared in a week,without much consultation, it is quite natural that this budget may not have met the expectations of all thestakeholders.hrough this article, I intend to highlight some of the risks attached to this budget. The finance minister

and his team should be aware of such risks and must have a Plan B ready just in case.he first risk is on the revenue side. The revenue target set for the Federal Board of Revenue (FBR)

appears to be highly ambitious. In 2011-12, the FBR collected Rs1881 billion and was targeted to collectRs2381 billion in 2012-13 – an increase of Rs500 billion or a growth of 26.6 percent. In response, the FBR is not likely to collect more than Rs1970 billion – and an increase of less than five percent or Rs89 billion.he FBR is now targeted to collect Rs2475 billion in 2013-14 – an increase of Rs505 billion or 25.6 percent

over the period 2012-13. Can an institution, which collected additional revenue of only Rs89 billion thisyear, collect more than Rs500 billion next year? Setting ambitious revenue targets has serious implicationsfor the budget as well. First, the resources allocated to the provinces under the NFC Award are calculatedon the basis of the revenue targeted for the FBR. If the target is ambitious, it will be reflected in higherallocation to the provinces. Provincial governments will prepare their budgets on the basis of the revenueallocated to them. In the event of any shortfall in tax collection, the provincial governments may not cuttheir expenditures, resulting in higher provincial as well as overall fiscal deficits.Second, under the NFC Award, Balochistan would receive its share based on the budgeted FBR revenueinstead of actual collection. Any shortfall in FBR’s revenue collection would not affect Balochistan’s share as  the federal government is obligated to pay out of its own share to Balochistan, thus widening the federalas well as overall fiscal deficits.Second, the important risk on the revenue side is the availability of the coalition support fund (CSF)amounting to Rs112 billion. From the American perspective, there is no outstanding amount left and theyare devising a new mechanism for the payment of dues going forward. Thus, there is a risk attached to thefactoring in of this inflow.he third risk pertains to the sale of licenses of 3G cellular services. A sum of Rs120 billion has been added

to the non-tax revenue. Is there enough appetite for 3G licenses in existing cellular companies after theexit of SingTel from Warid telecom? If yes, will they be able to pay for the licenses in one go?On the expenditure side, the fourth risk pertains to interest payments, targeted at Rs1153 billion. Thegovernment is going to finance circular debt amounting to over Rs500 billion, partly this year and partly

 

next year. Have we included approximately Rs55 billion interest payment on account of circular debt in theoverall interest payment?he fifth risk pertains to subsidies, particularly on account of inter-Disco tariff differential. The government

has kept Rs150 billion on this account in the budget. It may be noted that the difference between Nepradetermined and notified tariff amounts to Rs6 per unit. We consume 80 billion units of electricity per yearor around 6.5 billion units per month. If we do not increase tariff, the total subsidy stands at Rs480 billionin a year. Keeping Rs150 billion in the budget means that the government will pay Rs2 per unit subsidy,therefore, Rs4 per unit must be passed on to consumers on July 1.Will the government increase power tariff by Rs4 per unit on July 1? Any delay in tariff hike or partialincrease in tariff will add to subsidy and hence to slippages on the expenditure side.Sixth, the government has included Rs115 billion under the ‘New Development Initiatives’. This is perhapsa new development in the budgetary process. This inclusion has unnecessarily enhanced the size of thedevelopment budget. My suggestion is that such initiatives be linked with new resource mobilisation,otherwise the chances of slippages in the budget deficit will increase substantially.Finally, on the financing side of budget deficit there are risks as well. Payment from Etisalat has alwaysbeen part of financing item in the last five budgets. It has not yet been realised. Will the new governmentsucceed in receiving Rs79 billion from Etisalat in the next fiscal year?

 A sum of Rs110 billion is added against programme loans under external resources. This amount isconditional upon the successful conclusion of a new IMF programme, as well as upon taking some difficultdecisions in meeting the programme loans targets. Hence, there is a serious risk involved in these inflows.Pakistan is targeting to re-enter the international capital market by floating Eurobond in 2013-14. Do wehave enough runs on the scoreboard to attract global investors? Is Pakistan’s credit rating sufficient toentice global investors to invest in Pakistani paper? These are valid questions.

 All in all, Budget 2013-14 is a challenging one. The finance minister and his team must be congratulatedfor presenting the budget on time. This budget will not solve all the economic problems of Pakistan, but atleast it has given us a road map, a vision, a direction and hope. I have highlighted some of the risksassociated with this budget. The finance minister and his team must keep these in mind and set up acontingency plan in the event of slippages identified above, lest mistakes of the last five years arerepeated!he writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk 

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