State of Economy and Budget 2016-17

The government will announce the federal budget for next fiscal year, 2016-17, on June 3. This
will be the fourth budget presented by the incumbent government and probably the last full-year
budget before the next general elections. Looking at the state of the national economy, which
should set the tone of the budget, one finds a steady improvement during the past three years of
this governments tenure. The National Accounts Committee has estimated that the GDP growth
rate for the fiscal year ending June 30th would be 4.7%, up from 4.23% last year. This, the official
figures maintain, will be on the back of strong growth in the large scale manufacturing (LSM,
4.6%) and services sectors (5.7%), and the negative growth in agriculture (-0.19%) will be offset.
However, the growth is below the GDP growth target of 5.5% set in the Annual Plan 2015-16. The
growth in the primary agriculture sector of the economy is negative (0.19%) as against the target
of 3.6%1. While industry and services have recorded positive growth, this too is mainly on the
back of expansion in construction and in increased demand for consumer goods.
On an overall basis, and especially considering the state of economy this government inherited in
May-June 2013, the progress of past three years signals a modest turnaround. Year on year
performance for the outgoing fiscal, seemingly, is also encouraging. International financial
institutions and credit rating agencies are also noting the signs of stabilization in Pakistani
economy.
However, it would be pertinent to mention here that the foremost objective of the economic policy
making and management is, by no means, mere stabilization. First, the rate of growth the country
has achieved over past three years though inching up slowly is simply not enough and below
the real potential of the economy. The emphasis on stabilization at the cost of growth has raised
many issues unemployment; poverty and income and wealth disparity; deterioration in social
services etc. Economic fundamentals such as low level of national savings and investment, tax to
GDP ratio, public sector spending on human resource development, have not improved.
Lawlessness, insecurity and corruption have reached alarming levels.
The overall investments a prerequisite for broad-based growth in any economy remain stagnant
at around 15% of GDP for past several years. The governments own development spending
remains considerably below than what was budgeted for the outgoing fiscal year. Foreign Direct

This brief paper comes as a continuation of a 37 years old practice of presenting pre- and post-budget analysis and
proposals for the policymakers and all the stakeholders concerned. Part of the paper derives from a pre-budget seminar
held at IPS with the title of State of Economy and Budget 2016-17: Prospects and Priorities.
1
This is due mainly to a significant drop in cotton production, from over 14 million bales in 2015-16 to just over 9
million bales for the outgoing year. There are hardly any signs that PMs Kisan Package has been able to rescue
decline in agri-growth. Besides, some of the experts are also pointing to smuggled GM seeds for this years disastrous
performance of cotton crop.

Investment (FDI) is paltry and lacks diversification more than half of it coming from a single
source (China.)
Reliance on borrowed resources continues, and overall public debt hovering between 60 to 65%
of GDP remains on the higher side. Exports are witnessing a continuous decline and thus
phenomenal decrease in oil prices though saving some $8 billion on account of oil import bill
has failed to bring the trade deficit down. Current account is being supported by continuous, though
slowing, growth in remittances, which are expected to net around $19 bn. by the end of June 2016.
The main focus of the economic managers remains on major projects in communications
infrastructure and energy including the projects which are part of China Pakistan Economic
Corridor (CPEC) whose significance is understood for the growth of economy, but the relative
thrust on human development and wellbeing social services and safety nets is not up to the
mark. And last but not the least, independent economists also raise questions about discrepancies
in the reporting of data/indicators. For instance, FBRs total collection has risen, but that also
includes collections which traditionally are not treated as tax revenue and there are also claims
by exporters/importers that sizeable amounts of refunds are being withheld to keep the collection
figures higher. The methodologies of calculation of growth figures are also disputed by some
experts.
The question in this backdrop is that what should be the major priorities for the government, in
case of budgetary proposals for the coming fiscal, 2016-17. This is particularly important
considering that this would be the last full year budget to be presented by the incumbent
government, as somewhere towards the end of the next fiscal (2017-18) they would be seeking a
new mandate.
Institute of Policy Studies (IPS), Islamabad presents the following points/proposals for budget
2016-17:

The budget document (along with the Annual Plan and Public Sector Development
Program) sets the overall policy direction and should not be taken merely as a routine
balance sheet or accounting exercise. Budget for the coming fiscal year 2016-17 should be
based on long-term economic and development priorities of the nation, with focus on
human development and wellbeing and supportive infrastructure.
There is need to change the direction and focus of macroeconomic policies. Mere
stabilization of the economy is by no means the objective of economic management and
policy making. Macroeconomic policies should not focus narrowly on reducing budget
deficit, debt stabilization and reducing inflation. Polices should be mainly supportive
of growth and employment generation.

The point here is not in any way advocate lax fiscal policy but to give greater emphasis
to domestic resource mobilization and quality of expenditure.
o Domestic resource mobilization can be realized through: improved tax system
and tax administration reforms; broadening tax base; improving efficiency of
tax administration through training and retraining; tightening regulation on tax
heavens. In this respect, the government of the day always needs to have the
confidence of the taxpayers.
o The quality of developmental spending may be realized by striking a fair
balance in spending on physical infrastructure (roads, ports and economic
zines, energy) and social capital (through higher spending on education
specially technical education and skills development, health and social safety.)

In case of social safety nets, the continuing practice of increasing the allocations for
programs such as BISP (which has already reached over 100 billion rupees) needs to
be rationalized and the focus should be on making the disadvantaged segments of
society productive partners instead of dolling meagre cash-handouts to them.
Encouraging savings and investments in productive sectors of economy demands specific
and targeted incentives. It has to be ensured that historic low markup rate does not end up
increasing conspicuous consumption, over-investments in property and real estate etc.
Islamic modes of financing need to be particularly encouraged in this connection.
Agriculture being the mainstay of over 40% of the population and pivotal not only for
food security, but also for industrial development needs specific attention and a kind of
well-thought-out, targeted revival package. The negative impacts of GM seeds need to be
dealt with the governments intervention.
Textiles are the countrys main export, which require continuous attention (particularly in
a period when these are recording persistent decline). However, exports, other than those
of textile also need to be encouraged with specific incentives. One particular opportunity
rising in this regard is substantial expected increase in demand of rice in Iran, after the
lifting of international sanctions. This opportunity needs to be seized in a way that Pakistan
emerges as the leading exporter of rice to the western neighbor2.
There is a need to have a thorough study of the impact of the schemes like PMs Youth
Loan program have made. Redesigning and changes and scope may be required. Greater
focus is required for making agriculture, livestock and related businesses lucrative for
educated youth.
Considering the transformation that the Gulf region is passing through, and its moves
towards a post-oil economy (particularly in Saudi Arabia), countries like Pakistan need to
position themselves by initiating programs aimed at increasing our share in skilled labor

Pakistan held a substantial share in Irans total rice imports in 2009, the year prior to international sanctions on Iran.

needed by the GCC countries, and also targeting the opportunities for our export-oriented
industries in the emerging scenario.
China Pakistan Economic Corridor (CPEC) indeed presents opportunities for economy;
but it should be seen, viewed and integrated into the national economy as a whole. Besides,
it has to be ensured through federal governments policies and particularly budgetary
proposals and allocations that benefits of CPEC are equitably shared all across the country.
The 18th Constitutional Amendment and the last NFC Award require a new integrated
approach for budget making between the federation and the provinces. While taxes are
mostly collected by the federal government, their major share goes to the provinces.
Provinces have greater responsibility for education, health, agriculture, industry and some
others sectors. In such a situation, close coordination at policy and working level between
the federation and the provinces is essential. Federal government should take initiative in
evolving national policies, objectives and targets on key areas like basic health and
education, environment, water and energy in collaboration with provinces.