Budget 2024-25 – A Critique

What Pakistan today needs is export facilitation to ensure a growth in foreign exchange receipts and not the other way around.

The budget 2024-25 stands announced and contrary to one’s expectations turns out to be quite an anti-climax. Optimism had been building that with the induction of a finance minister from the private sector and one with rather impressive credentials, the budget will be structured in a way that not only takes Pakistan towards growth but also innovatively addresses the fundamental weaknesses in Pakistan’s operative environment. Sadly, it instead reads as steps that will further erode domestic manufacturing, stifle SMEs – the engine of growth and employment in any economy -, discourage exports, stoke inflation, likely to lead to further currency devaluations and perhaps most damagingly, a document that rakes in hypocrisy.

Despite reservations and criticism by many on the finance minister in effect hailing from a predominantly rent-seeking sector and therefore, a visionary approach based on behaviour economics may not come to him naturally, one was still expecting better! And it is in this context that in trying to analyse the budget one will not be dwelling on numbers and instead, try and focus on what actually the budgetary announcements entail in terms of determining the direction of the economy and on various sectoral developments that are likely to come about due to it. Reducing the size of the government: It is common knowledge now that Pakistan supports one of the most top-heavy governments as a percentage of GDP and that both, the government’s footprint and size have been increasingly over the years.

The need of the hour was to not only reduce the size of the government, but to also instil an element of accountability that correlates remunerations or even job security to performance. The country’s economic history is full of material evidences pointing to the role of poor governance, corruption, incompetence, non-transparent operational management and nepotism by bureaucracy and the political decision-making elites, to lead us to the present impasse. Even if the tangible numerical reduction from this exercise comes across as being insignificant as a fraction of the total outlays, it is the messaging and perception that are important, since wages as a percentage of costs never tend to be a main numerical component any way. Instead, what we see is that everyone here who has consistently performed poorly gets a dramatic pay rise, while the others are supposed to pay for this unwarranted extravagance - wonder who are the members of the government’s HR&RC?

As an anecdote, only recently, the popular libertarian President of Argentina, Javier Milei, fired the entire government machinery saying to them that why do we even need you if your performance is primarily responsible for Argentina’s economic problems. Th result: His government achieved a first-quarter primary fiscal surplus of 275 billion pesos, the first of its kind in 16 years. Taxation: The other main area where the negatives could just take the entire economic activity arena down is taxation. It is quite baffling that instead of first opting for the long pending FBR reforms, this government in yet another round of knee-jerk reactions, has decided to once again unleash a compromised tax machinery on the existing taxpayers and this time with more venom and coercion by further loading-up draconian laws and powers to the very system that in itself is in fact the biggest road block to a healthier tax to GDP ratio. FBR revenues have been growing at almost between 20% over the last five years with no real change in the number of effective tax-payers – the fact that the graph has finally begun to taper-off tells the entire story of how the government has sucked out a large portion of legitimate capital from the markets to a point now where the investors have nothing more to offer.

Flogging the same donkey just wouldn’t cut it anymore. Not to mention the fallouts of such a shift where the capital moves from efficient hands to inefficient hands! Ironically, at the same time the non-taxpayers continue to reap the benefits of a legalised cover for tax evasion through specially created categories like non-filers and choosing to remain outside of the tax net: legitimised sales tax evasion, Afghan transit trade, CPEC and unregistered retails are essentially the areas where the main tax revenue losses generate from. Also, needless to say that some of the categories chosen to be taxed are simply baffling, like for example, milk (including baby milk), books, stationary, and newspapers; what on earth are we thinking? and now unilaterally taking the exporters out of their fixed tax regime is just like rubbing salt to the wounds. What Pakistan today needs is export facilitation to ensure a growth in foreign exchange receipts and not the other way round. Whatever, happened to consulting the stakeholders before taking major decisions that can have very far-reaching effects on the very structure of an economy? Successfully steering exports is a specialised science and the Asian tigers who boast of export miracles didn’t achieve them by sheer fluke, but instead through a well-guarded vision and mindset to develop a national culture of exports - what this budget has done is to dismantle in one stroke any progress made thus far towards creating such an environment here in Pakistan as well! De-industrialisation: Pakistan’s main issue over the last years has been de-industrialisation. Free trade is very laudable, but the 2008 financial crisis followed by the Covid pandemic breakout and now the on-going wars in Europe and Middle East have all served as a rude awakening that countries that fall behind on protecting their home manufacturing base lose out economically due to becoming constrained in tools to tackle the economic repercussions that accompany such global upheavals. Once the supply-chain goes, vulnerable economies like Pakistan tend to suffer the most leading to a lot of pain most through respective external accounts. Any attempts to mitigate resultant inflation, poverty and unemployment risks largely go fruitless, since with the home industry gone the possibilities on import replacement or shoring up exports vanish as well.

This is precisely the vicious cycle Pakistan finds itself in, since now for more than two decades the de-industrialisation of Pakistan has been accelerating. One was hoping that in this budget the economic managers would seriously look into this rather dangerous trend, but the budget fails to capture any read redressals in this regard. With an increasingly competitive world where movement of goods has become fairly swift due to technological developments, shoring up home manufacturing is neither a simple exercise nor a one that can be undertaken quickly. It instead requires a long-term strategy, consistent and sustainable focus cum support and creation of an enabling operative environment based on market principles, efficiency and transparency. Also, it is important to identify strengths and weaknesses to avoid blindly entering a maze of industrial options and then using this data to precisely determine where one wants to grow, both sector-wise and geographically; on how we want to grow industrially, meaning by agreeing to a pre-demarcation of the public & private domains; on the manner in which they will operate in the market; and finally, who will lead such an initiative. Imagine an environment where foreign companies are bee-lining to exit, the legitimate domestic players are reluctant to invest and the FDI is being sought on a state-to-state basis rather than evolving organically between B to B - sadly, such a situation will only exacerbate our problems and not solve them.

While it is obvious that these trends unless quickly reversed do not augur well for the economic future of Pakistan, the frustration is that yet another budget seems to have gone by in falling short on finding any innovative solutions to arresting the rapid industrial erosion taking place in Pakistan – Good luck next year!

Dr Kamal Monnoo
The writer is an entrepreneur and economic analyst. Email: kamal.monnoo@gmail.com

The writer is an entrepreneur and economic analyst. He can be contacted at kamal.monnoo@gmail.com

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