The quest to formulate a viable development strategy in the recent budget which would aid in improving macro-economic indicators remains a herculean task for the PTI government. It is because, on the economic front, the government has been battling on multiple fronts.
The Covid-19 pandemic has caused considerable economic losses in the country related to livelihood and employment. And the IMF bailout package with its structural adjustment program has also created pressure on the economic team regarding tax revenues and curbing expenditures.
Cumulatively, these external pressures have impacted the recent budget which has raised questions on the current government’s pledges on advocating a growth-led strategy in its election campaign.
Therefore, the recent budget presented by the current government did not reflect the grand underpinning strategy to upgrade the economy. Instead, the decisions taken by the economic team highlight short-term gains that are devoid of sustainable progress essential for these testing times. Thus, the quest to emulate Asian tigers’ progress remains a pipeline dream even in the third yearly fiscal budget by the PTI government.
East Asian development strategies
The economic measures taken by East Asian countries reflect their long-term ambitions in boosting exports and investing in research and development. Additionally, the bulk of their economic input rests on upgrading their labor through skill development on modern lines and vocational training.
Thus, the secret of Singapore’s success lies in its timely investment in human capital and making its geostrategic location its asset. That is why today it is one of the competitive economies of the world with high literacy and low poverty and malnutrition rate.
By supporting the high-end industries and entrepreneurs on technical, R&D, and marketing, these states allow their companies which are the backbone of national progress, to grow exponentially. Such measures are missing from our budget which shows no clarity on likely progress on key criteria against whom the budget should be evaluated. They include upping social equity, upgrading the technical standard of the economy, and upping tax and exports revenue.
Therefore, the ideas presented in the new budget are like old wine in new bottles. There is a relief for pensioners, laborers, and civil servants that indicate some degree of social equity along with relief for numerous industries instead of few key ones which the states choose to upgrade the economy.
Some decisions back the politically favored rather than economically promising ones. It is because the tax concessions and breaks offered to supposedly key industries have been counter-productive as technical up gradation or expansion motive have not been attained for decades. Even though work has been done on technical and R&D issues, its linkage with the performance is missing.
Dairy sector bleeds with further budgetary constraints
The dairy sector has seen a hike in the General Sales Tax (GST) rate from 10 percent to 17 percent on milk, cheese, yogurt, butter, flavored milk, tea-whitener, and cream. This move will lead to the price of these milk products skyrocketing resulting in an additional payment of Rs 5 billion by people residing in cities who use packaged products.
The Pakistan Dairy Association elucidated the repercussions involved in increasing taxes in the form of fuelling inflation and playing with the health of the nation. It is because dairy plays a fundamental part in a nutritious diet that fosters a robust and energized build of children in their growing years.
Consequently, the dairy sector will receive further setbacks with this decision. It was already lagging due to a lack of modernization and the quality and quantity of yield produced. Industry insiders suggest that the recent policy shift will weaken the already sapped dairy industry by 15 billion rupees in the next three years and adversely impact people’s livelihood and their diet requirements.
The ramifications of this “nutrition tax” on milk, butter, cheese, and cream can be seen in the paralysis of the common man’s ability to access healthy and nutritious products. This measure will adversely impact the health of our young population and mothers who are the bedrock of a progressing society.
More than that, this decision stands at odds with the PTI government agenda that vowed to breathe life in the already depleting and under-performing dairy industry which could enable exports in the long run and ensure the wellbeing of our growing population. Thus, the decision to increase the taxes on the dairy sector is a contradiction of PTI’s growth-driven objectives.
Malnutrition worsens as “nutrition tax” bleeds the dairy sector
— The Dayspring (@the_dayspring) July 1, 2021
Small-ideas in budget
Although there is a range of Benazir Income Support Programme (BISP) related programs along with the considerable increase in the development budget, these targets will stand unachievable if tax revenues are not met. As a result, these projects will have low efficiency, high leakages, and dubious connections with economic growth or revenue expansion.
Consequently, such budgets will fuel fiscal and current account deficits by wasting resources on shallow ideas which neither boost revenues through taxes and export nor guarantee long-term development.
Even though the past regimes have added fiscal and current account deficits in the economic pool, the current government, despite its pledges to do the otherwise, has also fed its own share of fiscal deficit. Moreover, as the tax to GDP for the fiscal year 2020-21 stands at 11 percent, it is apparent that the economic slowdown due to the pandemic has hurt economic activities and tax collections.
This indicates that there are lesser funds with the government to enhance its development expenditures in health, education, and poverty alleviation schemes. Therefore, broadening the tax net and inducing reforms in FBR which is the lifeblood of economic development in Pakistan is essential.
The recent budget and the IMF take on it
The pro-growth fiscal policies listed in the recent budget highlight the economic team’s confidence that it can deliver the IMF program objectives without raising individual or income tax or electricity rates.
Although the recent deferment of the IMF review can be interpreted as a sign that the fund is willing to support the new growth policies by showing some flexibility, the challenge lies in the fact whether the economic team will be able to deliver its promises. If the government succeeds in boosting revenues, reducing power sector debt, and enhancing social spending, the IMF may show some flexibility.
However, at this point, the IMF spokesperson’s statement shows that the fissures continue to hiver over Islamabad’s decision to change its course in the middle with the lender’s insistence to speed up the implementation of the policies and reforms required to address the long term challenges facing the economy.
Thus, it becomes clear that if the economic team does not succeed to foster the objectives contrary to IMF contractionary fiscal policies as a part of its structural adjustment program, then the prospects of getting more dollars and leeway from the lender of the last resort will be difficult. In addition, much relies on US withdrawal from Afghanistan highlighting the intertwined geopolitics and geo-economics in the regional context.
Hadia Mukhtar is a Pakistani geopolitical analyst in Karachi with a keen interest in international relations. She has worked as a content writer for international publications and has worked on non-fiction books. Currently, she is Assistant Editor at GVS. She can be reached at firstname.lastname@example.org.The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.