Institute of Policy Studies, Islamabad Federal Budget 2015-16: Setting the Priorities

Recommendations Budget is the most important indicator of a governments priorities economic, social and beyond that, political. The document usually gives a clear indication of the direction in which the government is steering the country, its economy and society. The incumbent government is going to present the third annual budget of its tenure after taking the reins in June 2013. Today, the indicators of national economy during first ten months of Fiscal Year 2014-15 are presenting, by and large, a positive picture. However, it is also a fact acknowledged by the countrys central bank, among others, that this seemingly healthy state of affairs is due mainly to some positive developments taking place on the external front, notable among them a steep decline in global oil prices since the middle of 2014 onwards, and surge in remittances of Pakistani expatriates. Several structural weaknesses such as energy and water shortages; narrow tax net and distorted tax regime; continuous dependence on debt, even for servicing of interest on debt itself; persistent low growth in the commodity sector and traditional structure of the farm sector; depleting industrial base and deplorable condition of the social sector continue to plague the overall picture. Institute of Policy Studies (IPS), Islamabad has continuously been focusing on the state of economy and presenting to the policymakers recommendations for a sustainable, equitable and inclusive growth and development. Realizing that the resource base is limited and issues and challenges are multiple, IPS believes that the time demands setting of well-though-out priorities to restructure and rejuvenate the economy, on sustainable basis. IPS believes that at the macro level, burgeoning debt burden and consequent distortions dictated by huge debt servicing are among the foremost priorities. A major rethink and alternate strategy for self-reliance is a must to come out of this cesspool. Further, the following set of recommendations, for respective sectors, are based on presentations made in a pre-budget seminar Federal Budget 2015-16: Setting the Priorities1 held at IPS on May 14, 2015 in addition to the research conducted by IPS team. Tackling the Crippling Energy Crisis

The most pressing problem being the circular debt hampering the ability to utilize the currently available generation capacity, a permanent solution must be found for it. It is basically a governance issue which must be resolved by

1 The seminar was chaired by Prof. Khurshid Ahmad, Chairman IPS. The panelists included: Dr. Naheed Zia Khan, Dean Social Sciences, Fatima Jinnah, Women University, Rawalpindi; Mirza Hamid Hassan, Member, IPS National Academic Council; Dr. Wajid Pirzada, CEO, Roots Pakistan; Dr. Shimail Daud Arain, Former President, RCCI and Riyazul Haque, Member, IPS National Academic Council. Some of the suggestions are also relevant for the provincial governments and their budgetary measures, but are given here as overall policy related guidance.

a firm policy of recovery of dues from defaulting federal government organizations and provincial governments at source from their budgetary allocations while addressing their excuses of reconciliation of dues subsequently within a specified period. This would make both the suppliers and consumers of electricity serious about reconciliation of the dues and ensuring prompt payment by all users of energy. The private sector must be forced to clear dues even if resort has to be made to disconnecting supply.

While efforts must continue for increasing the generation capacity for future needs, the current policy of generation of additional thermal power from imported coal deserves to be reconsidered due to its cost implications. Efforts for utilization of indigenous coal reserves in Thar as well as other areas must be redoubled.

Greater attention should be paid to hydropower for energy security and affordability in the longer term.

Adequate funds must be allocated for refurbishment and expansion of the transmission and distribution systems to reduce line losses and enable it to take up the load of the additional generation capacity being created.

Efficiency improvement program of old power units must be expedited. A clear and consistent policy in respect of solar energy is very much need.

On the one hand the Government is proud of 100 megawatt project in South Punjab and on the other suggesting hands off in respect of new alternative energy projects.

All these measures are expected to enhance availability and reliability of energy and reduce cost of electricity for the consumers.

Oil and Gas Sector: Vigorous efforts are needed for exploration of oil and gas in the country. Financial and fiscal incentives alone will not work unless the security situation and the enabling business environment are improved to attract foreign exploration companies. In addition, Iran Pakistan gas pipeline is the quickest and most feasible project to ensure early availability of additional gas so badly needed by the countrys economy and should be seriously pursued.

Rejuvenating the Moribund Agriculture

The first and foremost step required is a paradigm shift from primary commodity production to make serious and concerted efforts to develop value-added agriculture sector, by mainstreaming value-chain management across all subsectors of agriculture. Investment in value chain management and duty free import of equipment e.g. for fruit/mango pulp production and chillers for dairy sector should be prioritized.

Targeted subsidies for source inputs fertilizers, electricity & water for small & landless farmers; and compensatory policies like crop/livestock insurance need to be introduced.

Investments are required in Sanitary and Phyto-Sanitary (SPS) quality infrastructure, border control of diseases, food safety & veterinary public health.

There is an obvious need for establishment of Early Warning Systems for disasters & Climate Change effects such as famine, drought and floods. A Climate Change observatory is required in the country.

Institutionalization of compensatory policies such as crop/livestock insurance and targeted subsidies for resource poor farmers will be useful.

Investment in innovative & problem solving research driven towards development goals will pay the dividends.

Proper facilities for micro-finance and their timely monitoring by the State Bank of Pakistan would make a difference.

Preserving the Blue Wealth

Considering the multidimensional significance of water from drinking and other domestic usages to agriculture, power generation and industrial purposes and fast depleting sources of surface water, greater emphasis is required to building small, medium and large reservoirs as and where feasible. More public sector investments in this connection are inevitable.

While energy sector has its own requirements, hydro power projects serving the dual purpose sound more appropriate and need of the hour. Water storage capacity cannot be sacrificed in the long run2.

Technologies, tools and equipments promoting rational usages of water in agriculture and industry must be offered incentives. In particular, over two thirds of water wasted in the countrys moribund irrigation system calls for a comprehensive program of action on war footings.

There is need to check continuous lowering of underground water table. This may be ensured through rational taxation on and utility charges for tube-wells.

Provision of safe drinking water to all the countrymen needs to be made an important area of government intervention. User education to ensure optimal use of water by consumers and avoid all wastage and misuse, is also required.

Tuning the Productive Engine

While a set of measures has been recommended above for tackling the energy issues prerequisite for economic activity and particularly industrial development proper planning and encouraging incentives are also required to build a sound industrial base of the economy.

2 For instance, BashaDiamir project seems to have been put on the back burner in favor of Dasu apparently due to donor preference and financial commitment for the latter. Dasu is a US$ 5.0 billion run-of-the-river power project of 4320 MW capacity with no water storage capacity. In comparison Diamir-Basha is a multipurpose dam with a water storage capacity of 8.1 million acre feet (MAF) in addition to a power generation capacity of 4500 MW. But it is estimated to cost about US$ 14.0 billion. Hence donor preference for Dasu. However we are threatened with a water crisis much more serious than the current power crisis due to drastically reduced per capita water availability, expected to be further exacerbated due to impending climate change. Diamir-Basha therefore needs to be brought forward and pursued more vigorously for funding purposes.

Export oriented industries except for those already pampered ones should be encouraged to invest more in Research and Development (R&D) and Balancing, Modernization, and Replacement (BMR) programs.

Import of machinery for promotion of industries based on raw material inside the country should be made easy and affordable (machinery and technology related agri-based industries as mentioned above, marble, gemstones can enhanced the export base of the country.

Value addition in exports should be encouraged and incentivized. Industries facing unfair competition (such as dumping) from foreign exporters

must be provided domestic protection for survival and to be able to compete on level playing field.

Harmonizing the Distortive and Exploitative Tax Regime

Firstly, it is imperative to establish the trust of governments tax collection machinery, among the tax papers and those who can be brought into the tax net.

The tax base needs to be broadened; and only intermittent issuance of notices will not work for the purpose. A grand strategy is required with quantifiable targets and benchmarks. Tax evaders must be brought to the task.

Exemptions and distortions provided through statutory regulatory orders (SROs) need to be done away with.

Share of direct taxes with focus on those who can pay more, wealthy businessmen, professionals and landlords needs to be enhanced and that of indirect taxes such as across the board GST needs to be brought down, considerably.

Luxurious products and services (luxury cars, housing units, luxury sports etc.) should be taxed accordingly, and with full resolve and vigor.

In order to avoid the tussles that crop up time and again as any government initiates some registration campaign, a proper mechanism or authority to register all the businesses is required. Those using public utilities for commercial purposes may be registered as NTN holders. More than 40 chambers of commerce and industry spread over the countrys important industrial and business hubs may be involved in registration.

Claims of tax rebates need to be made simplified and hassle free. Such refunds must be made within a specified period, failing which the Government must pay a deterrent penalty.

Caring for the Under Privileged

Education and health sectors are in a dilapidated condition, all across the country. Despite having been devolved to provinces, there is an urgent need for increasing the spending on health, and education services. Mere allocation of funds, however, would not suffice. It is becoming a common practice that while some amounts may be set aside for certain health and education sector developments schemes; only a small chunk of that is

actually released and utilized. The capacity of these two sectors to properly utilize the amounts allocated annually also needed to be built, to augment the deteriorating social sector infrastructure. Efficient infrastructure for performance, audit and accountability is a need of the hour.

The housing deficit has been widening continuously over past couple of decades and the annual addition into housing units is not able to meet the annually increasing demand itself, much less bridge the gap already existing. The government needs to incentivize low cost small housing units to make them affordable for the salaried and low income classes.

While retired civil and military officials receives certain pensions, and there are also some benefits under EOBI for employees of registered employers, a large segment of informal workers have nothing to fall back in their elderly age, and thus are forced to live lives of dependence and destitution. There is a need to develop welfare schemes for the elderly.

The mechanism and methodology of schemes like BISP, which are practically turning some five million families into permanent beggars, need to be reviewed as well as made more transparent, free of political maneuvers, as well as target and result oriented. The target should be to take the recipients out of destitution, by making them earning members of society and not steeping more and more into dole-culture and life of dependence.

The Mother of All Issues Governance While allocations can be increased, rates be revised and regulations may be modified; little impact will actually be made unless there is tangible movement towards improving the overall governance edifice of the country. Stringent measures from conception to planning and execution and in between or a project, need to be introduced. Monitoring, checks and balances, incentivizing the performances and penalizing the wrongdoings3 have to be part of the overall scheme of things. Our major failures are due to bad governance, wrong and delayed decision-making and inefficiency, even, collapse of the delivery systems. Unless the root causes of failure are thoroughly redressed things may not change for the better, despite great allocations. Politics will have to be divorced from development. And accountability should be across the board, in terms of utilizations of public invested authority and resources.

3For instance, serious measures must be taken to check electricity theft. In addition to administrative measures technical measures should also be used for this purpose.