Review of Budget 2017-18:

Budget 2017-18 was presented in the light of protests by farmers. The budget show the
disconnect between economic policy making and realities of the productive sectors. According to
the Finance Ministers budget speech, he promised that in this budget more focus on the growth
of industry and agriculture sector but the government respond with ad hoc measures. Finance
Ministry conducts the Economic survey 2017-18, which showed several weaknesses in the
economy. In IPRs view, Government has not touched the structure of the economy or its
political economy. They focus indirect taxes over direct taxes, continued increase in public debt
and the federal PSDP focus to invest in highways over all other expenditure. There is need to
build efficiency of agriculture and industry to restore the economy. While government has
announced a series of measures for these sectors and need long term planning for good results.

During 2015-16 the economy grew by 5.28% against the target of 5.7%, but contribution of the
productive sector, agriculture and industry, was 1.74% and their share in the GDP fell. On the
other side, fiscal deficit was high and the current account deficit is twice the estimated amount.
Savings fell from the year before. National savings was 14.3% of GDP in 2015-16, it declined to
13.1% in 2016-17. Domestic savings fell from 8.2% to 7, 5% of GDP. Investment was 15.8% of
GDP in 2016-17 against a target of 17.7%. In the field of health and education showed no
improvement and the Public debt has reached 62.3% of GDP. External debt is 23.4% of GDP.

In budget 2017-18, government predicts a growth rate of 6%. Fiscal deficit is targeted at 4.1% of
GDP. GOP moved to a growth strategy from stability. FBR achieved the target of 20% increase
in revenue in 2015- 16 and another 13% in 2016-17; it will need to increase collection by a
further 14% in 2017-18 to collect Rs. 4,013 Billion. The budget provides an increase of 4.3% in
other taxes and 7.4% in non-tax revenue and assumes that energy price will increase. And also
estimates a provincial surplus of Rs, 347 Billion. Each year, surplus from provinces have fallen
short of budgetary provision by a large margin. In an election year, it is determined to expect it to
increase. In a positive move, the Finance Minister announced GOPs plan and to observe more
strengthen the provisions. It had promised to do so last year as well, but in March 2017, total
debt and liabilities were 62.3%, i.e. beyond the laws limit

Current expenditure is to increase by 2.3%, inflation is to be 6%, and this means the budget may
need revision and the total expenditure is increased as compared to the previous budget. Civil
government and defense employees have been allowed 10% and 20%. Although provision for
defence services has increased by about 10%, security often places additional demands. Limiting
increase in current expenditure in 2016-17 to 2.3% over 2016-17 will be a challenge. In the
IPRs view, all this will stress the fiscal framework and make it that much more difficult to
achieve the deficit target.

The budget provides increase in FBR tax collection by Rs. 492 Billion to 572 Billion in tax and
non-tax revenue. Over 48% of the additional tax revenue is to come from indirect tax, in the
shape of GST, FED and Custom Duty. FED has been increased to 5% on cement and
withholding tax on tobacco production has increased. And it has number of incentives for the
productive sectors. GOPs efforts to revive agriculture centre on reduction in input cost and other
fiscal incentives. Some past incentives that are to lapse have been extended. While these are
positive steps, some observations are necessary. This is important to ensure that the incentives
work and have the desired effect. These sectors need long term support for the growth but
government has not looked at these sectors.

This years PSDP has increased allocation for the water sector to Rs. 36 Billion. This is still Rs.
10 Billion less than the allocation of 2014-15. Water must receive higher priority. Several
measures for farmers are encouraging. These include holding or reducing fertilizer prices and
concessional agriculture financing. In the last two months, there are signs of mild recovery of
export. Continuation of attractive rates for LTTF and export refinance scheme will help also and
is important other than textiles Pakistan also must become part of the global supply chain. This is
the time to make these choices when SEZs with the help of China will offer an opportunity to
attract investment in new industries. We hope that these incentives will have the desired effect on
growth.

The budget makes no big moves and no significant effect on the people. The budget has
negligible relief for exit from poverty. It is good to see continued commitment and enhancement
of the Benazir Income Support Programme.. Increase in GST, FED, and import tariff on some
consumer and industrial items will increase prices and burden on the poor. It will also increase
inequality. The budget directs few resources towards reducing the social deficit. However, the
federal government does not state it as a priority. Allocation for it in the PSDP is in the shape of
discretionary funds for ad hoc use. Improving provision of basic human needs adds to the total
capacity of the economy and stimulates growth. The budget gives targeted subsidies to small
farmers. This will be poverty reducing.

A 25% increase in federal development budget from the original 2016-17 level of Rs. 800 Billion
to Rs 1 Trillion is welcome news. This reorients public spending towards development rather
than current expenditure.

However, there are a couple of concerns.

Increase in the budget to Rs. 1 Trillion was sudden and way beyond what the concerned
ministries had proposed. But the use of these funds to meet the severe shortage of
physical and soft infrastructure and human resource deficit in the country. The PSDP
increase focuses on transport, especially on roads and highways. The allocation for roads
almost doubles from last years Rs. 165 billion to Rs. 320 Billion. On the other hand,
governments allocation for the power sector has declined. It has fallen from Rs. 75
Billion to Rs. 60 Billion.
 The other concern is increase in discretionary special schemes. These total Rs. 242.5
Billion of the development budget. They include PMs SDG programme, Special federal
development programme, Energy and Clean Drinking Water for All, a separate special
provision for CPEC, PMs Youth initiative and more. IPR feels that some of these
politicize use of development funds and especially in view of the coming elections.

In essence, the federal PSDP is Rs. 758 billion rather than Rs. 1 Trillion.

Some encouraging signs in the PSDP are increase in funds for HEC from Rs. 21.5 to
35.6 Billion. Health has seen an increase from Rs. 25 Billion to Rs. 48.7 Billion.
Railways have increased from Rs. 41 Billion to Rs. 43 Billion. Overall, the PSDP shows
several positive developments. However, power sector should have received higher
funding.

Total numbers of projects have increased from 813 last year to the present 1148.The PSDP
focused on smaller number of key projects.The federal PSDP is about 20% of the total federal
budget of Rs. 5,104 Billion. Although this has corrected a long-skewed relationship between
current and development, we hope there will be no cut in development funds.

The Pakistan economy has been in low to moderate growth for several years. Serious
infrastructure gaps and social deficit constrain business development and depress living
standards. They are important for providing stimulus to the economy as well as to enhance
business competitiveness.

The budget makes no strategic departure from the past, though it includes several incentives for
mostly traditional sectors of agriculture and textiles. Its framework is weak and the fiscal deficit
will be more than the projected 4.1% of GDP. Similarly, current account deficit seems out of
control and would likely be more than the reduced amount of USD 8.9 Billion. Managing the
Balance of Payments will be a big challenge in the coming fiscal.