Inclusive growth initiatives in Pakistan are vital for sustainable growth
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The FY2022 Government of Pakistan budget proposal assumes a higher GDP growth rate for the coming fiscal year than the previous three. The growth momentum assumptions are supported by a revival in large-scale manufacturing, growth in exports over the previous year, increased industrial electricity consumption and private sector credit off-take. Construction, the largest employer in the urban sector, and agriculture, the largest employment sector in Pakistan overall, are both seeing strong growth.
The austerity measures taken over the previous three years have successfully stabilized the economy but real wages have seen a decline. Although the stage may now be set for growth, it is important that it is accompanied with rising personal incomes. This in turn should translate into improved general welfare. Pakistan’s inability to sustain short spurts of GDP growth can partly be explained by its focus on aggregate statistics of production while not adequately investing in the people.
Pakistan’s United Nations Development Program’s Human Development Index (HDI) ranking is at 154 among 189 countries. Just as disturbing is the fact that over the last decade Pakistan has fallen 29 places in the HDI ranking. This reflects the failure to address the crucial human aspect of developing citizens’ capabilities. In order not to repeat the earlier cyclical pattern of growth, the government has budgeted significant increases towards economic empowerment, programs to improve basic/higher education and skills training, and health entitlements for FY2022 among other social sector initiatives.
The budgeted programs include enabling four to six million low-income citizens to take up interest-free business loans of up to half a million rupees; an interest-free loan of PKR 150,000 as working capital for small farmers as well as PKR 200,000 for the purchase of agricultural implements; and an interest free loan of up to two million rupees that can be accessed by low-income households for building a house.
The Ehsaas Programme, which has helped improve food security and reduce overall poverty through periodic direct cash support, is being increased to PKR260 billion in FY2022 from PKR 210 billion in FY2021 to target almost 19 million lowest-income households in FY2022. The Planning Commission of Pakistan estimates that the standalone impact of Ehsaas transfers in FY2021 resulted in reduction of the poverty headcount by two percentage points.
It is therefore important that the budgeted increase in social sector spending is not adversely impacted by any revenue collection slippages and budgetary cutbacks.
Javed Hassan
The government has also significantly increased budgetary allocations towards health initiatives like the Sehat Insaf Card, higher education development, skilling and empowering the youth through Hunarmand Skill for All program and the Youth Entrepreneurship Scheme, both under the Kamyab Jawan Program. Not only has the share of the Public Sector Development Programme (PSDP) allocation on social sector increased to an all-time high of 20 percent for FY2022, but overall PSDP expenditures have increased by 38% from PKR650 billion in FY2021 to PKR900 billion in FY2022.
These initiatives are vitally important in alleviating the conditions reflected in Pakistan’s poor HDI statistics. The state must invest in these programs not only for a more inclusive growth model but also to ensure that it is sustainable. Investment in poverty reduction, improving the health of the nation and its education/skills level to be able to avail economic opportunities must be prioritized as much as overall GDP growth.
It is therefore important that the budgeted increase in social sector spending is not adversely impacted by any revenue collection slippages and budgetary cutbacks. The government expects to raise an additional PKR1.34 trillion in tax and non-tax revenue for FY2022 over the previous year. It is reasonable to expect, on the back of 13% nominal GDP growth, that an additional PKR600 billion over FY2021 base of PKR 4.93trillion can be raised. To fill in the PKR 740 billion shortfall, PKR 610 billion is expected to come from the petroleum levy and the balance from the broadening the tax base.
If the levy remains at around Rs.5 per litre and assuming annual consumption of almost 20 billion litres of petrol and diesel, there could be as much as PKR500 billion shortfall compared to the budgeted levy target of PKR610 billion. This would imply that the estimated overall revenue shortfall could expand close to Rs1.2 trillion before accounting for additional revenue from broadening the tax base. Assuming PKR400 billion additional sales tax revenue is collected as a result of innovative measures such as linking the Points of Sales (POS) to the Federal Board of Revenue’s (FBR) system, and the $2 billion from Saudi Arabian deferred oil payments facility is available and treated as Rs300 billion of revenue, there would still be a revenue gap of almost PKR500 billion.
If there is such a shortfall, it is hoped that it does not result in vital developmental expenditure being cut. In order not to exceed the fiscal deficit target of 6.3%, the government may then have to consider alternative sources of raising revenue such as increasing power tariffs and trim related subsidies as well as increasing the petroleum levy.
– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
Twitter: @javedhassan
