KARACHI – Pakistan is to boost defense spending 10% in the coming 12 months under the budget announced on Wednesday by Finance Minister Ishaq Dar even as the economy is burdened by an 8.8% budget deficit, damaging power shortages and the prospect of having to secure more support from the International Monetary Fund.
Dar’s 3.5 trillion rupee (US$35.5 billion) federal budget for the fiscal year starting on July 1 included an allocation of 225 billion rupees for the energy sector. He said the government would clear $5 billion in circular debt from the energy sector within the next 60 days by bringing down subsidies and gradually increasing electricity tariff for all consumers.
“This will greatly help minimize power cuts in the country,” Dar said in his budget speech. At present people have to survive a torridly hot summer amid electricity blackouts of up to 20 hours a day, while the power shortages are also stifling industry and costing an estimated loss of from 1.5% to 2% or more of GDP growth annually.
Dar, who proposed to bring General Sales Tax (GST) up from 16% to 17%, announced to bring tax-to-GDP ratio up to 15% from 9%, one of the lowest in the world. Critics say that increase in GST will have inflationary impact hitting the masses, who are already hard hit by soaring commodity prices. The government announced no increase in salaries of the government employees, who have announced to hold country-wide protests.
About 60% of the budget will go to debt servicing and defense. The government earmarked 627 billion rupees for defense, up from 570 billion rupees in the outgoing year, ending June 30.
Critics say the government includes the bill for military pensions on the civilian side of the federal budget, on the face of it lowering the military budget while continuing expenses at the same levels. The country’s actual military spending has been more than the amount allocated each year under the defense budget, with “security” operations also being accounted for separately.
The country’s public debt will cross the 14 trillion rupee mark in the next three weeks, up 1.3 trillion rupees on the previous year, according to the Economic Survey of Pakistan for fiscal year 2012-13 presented on Tuesday by Dar. This will be a violation of an Act of parliament that restricts government borrowing to below 60% of total national output.
Dar took the oath as finance minister in the newly elected government led by Prime Minister Nawaz Sharif last week. A major challenge is the danger of a balance of payment crisis, with foreign reserves down to $11.46 billion at the end of May. The central bank holds $6 billion reserves, which is just enough to pay for two months of imports.
The shrinking reserves could lead to a repeat of the 2008 balance of payments crisis when the government of prime minister Yusuf Raza Gilani was forced to turn to the IMF for a bailout package. Pakistan is still repaying the $11.3 billion loan it received at that time. Dar helped to negotiate an IMF loan in 1998 during a previous stint as finance minister.
An IMF team is due to visit Pakistan this month, but the country’s new leadership is reluctant to immediately go to the IMF for what would be an unpopular bailout, preferring to launch an economic revival package first to shore up its finances.
“Right now, you can’t reach an agreement with the IMF because the kind of conditions they would impose on you would not allow you to grow,” Reuters reported Sartaj Aziz, a key economic adviser to the new government and who served as finance and foreign minister in Sharif’s two previous cabinets in the 1990s, as saying. “But if our economic revival package starts working in two months, three months’ time, and it is clear that exports are picking up, and our revenues are going up, then you need much less adjustment than indicated by the present situation.”
Local experts however believe that any delay in asking for an IMF loan could spark a crisis of confidence as the repayment of the existing loan further drains reserves. The country has to repay around $530 million to the IMF by the end of this month.
Syed Fazl-e-Haider (http://www.syedfazlehaider.com) is a development analyst in Pakistan. He is the author of many books, including The Economic Development of Balochistan(2004). He can be contacted at email@example.com.
Source: Asia Times