Pakistan plans record 2007/08 development budget

[MirBadshah]

Pakistan plans record 2007/08 development budget

May 31, 2007

ISLAMABAD (Reuters) - Pakistan plans to boost development spending to a record 520 billion rupees ($8.56 billion) in its 2007/08 budget, taking advantage of strong economic growth, a senior government official said on Wednesday.

Development spending will be nearly 20 percent higher compared with an estimated 435 billion rupees for the current fiscal year, ending on June 30. The 2007/2008 budget is due to be announced on June 8.

"The record allocation for development is made on the basis of available resources after a robust performance by the economy," said an official at the planning commission responsible for preparing the development budget.
The National Economic Council, the highest decision-making body on the budget, is due to meet on Thursday to make final decisions on budget allocations.

According to media reports, a total outlay of 2.1 trillion rupees is expected for the 2007/08 budget, which would be nearly 60 percent higher than the 1.3 trillion rupees budget for 2006/07.

The government expects the economy to grow 7.02 percent this year. It is expected to raise the growth target to 7.20 percent for the 2007/08 fiscal year, said the official, who declined to be named.

Of the total 520 billion rupee development budget, 485 billion rupees will be spent on infrastructure and social sector development and 35 billion rupees on rehabilitation in areas hit by a big earthquake in October 2005, the official said.

"Increased spending on the social sector shows the government's commitment to provide better education and health services, especially for the poor," the official said.

Despite some improvement, poverty is still widespread in Pakistan with 23.9 percent of the population living in poverty in 2004/05 compared with 34.5 percent in 2000/01.

And the poor have been hit hard by rising prices, economists say. Average inflation was likely to be close to 7.8 percent for the 2006/07 fiscal year, against a full-year target of 6.5 percent.

Average annual 7.0 percent GDP growth over the past four years has pushed revenue collection to record levels, with the government expecting to collect 830 billion rupees this year, the official said.

The government is likely to set a revenue target of 1 trillion rupees for the 2007/08 fiscal year but the tax-base remains narrow with only about 1.36 million people out of a population of 160 million registered as tax payers.

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[Shehz]

A Public Sector Development Programme (PSDP), estimated to cost Rs520 billion for the next fiscal year, will be presented before the National Economic Council (NEC) for approval. Going by the critical shortages of energy, water, human skills and modern transportation facilities for an economy witnessing a robust growth of seven per cent per annum for the past four years, a nearly 20 per cent increase over the last year’s budgetary allocation on development spending would not appear to be an over-ambitious target. But the critical issues linked to development spending of this enormous size are the government’s ability to raise the required funds, to use the available resources productively and to bridge the implementation gap. Economic managers are confident that the government’s financial position is comfortable enough to finance the proposed development plan. Official optimism is based on tax revenues exceeding this year’s target and the next year’s potential of a stipulated growth of 7.2 per cent of an economy that has doubled in size over the past five years to well over $143 billion. But there are already fears that with a much lower PSDP at Rs435 billion for this year, it may not be possible for the government to stick to the fiscal deficit target of 4.2 per cent despite its strong commitment so far.

Given the slowing down of the tax revenue growth in the second half of 2006-07, the State Bank, in its third quarterly report released on May 26, cautions that "expenditure growth needs to be monitored." Rising sharply, the government borrowings were Rs190.5 billion during July-March 2007 — four times the amount borrowed in the same period last year. According to a document prepared by the Annual Development Plan Coordination Committee for the NEC, slower than expected financial releases by the ministry of finance is responsible for tardy utilisation of budgeted funds estimated at Rs150 billion for the first nine months of this year as against the annual federal PSDP of Rs270 billion. Independent economists close to the Planning Commission say that a big chunk of funds not utilised this year would be used for the next budget. About 100 projects worth Rs62 billion are reported to have either been delayed or sidelined for the final quarter of this year. If these reports are correct, they indicate either a lack of funds or second thoughts on the intrinsic worth of the projects.

The implementation gap in development spending has invited criticism that the government lacks the capacity to undertake very large development programmes. While officials claim that the efficiency of financial utilisation has improved by 10 per cent to 60 per cent for three quarters of this year, anecdotal evidence suggests that the government’s capacity to implement projects in time and within stipulated costs is not improving significantly because of the absence of proper planning, designing and monitoring. Cost overruns are becoming more common. While the need for a much larger development programme cannot be over-emphasised to sustain the economic growth momentum, it is equally important to improve the delivery system by bringing about further administrative reforms. In case the development funds are not productively used but are wasted, they would widen the fiscal deficit, raise inflationary pressures and also impact adversely on the already worsening current account deficit. These risks to macroeconomic stability are likely to become more pronounced in an election year.