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An economic evaluation of budget 1990.

An Economic Evaluation of Budget 1990

The year 1989-90 is particularly important being the first complete year of an elected government of a party which has a manifesto with strong economic orientation. It may be said at the outset that one cannot expect all the structural problems of the economy to be removed in such a short period especially when the freedom of choice is constrained. A reasonable measure of success is, therefore, to assess as to whether a sustainable change has occurred in the right direction. Measure by this standard the overall picture which emerges gives enough reasons for serious concern about the state of the economy, but at the same time points out to several important indicators registering significant changes in the right direction. However, it is difficult to conclude that these changes are sustainable because their causative links with policies are not yet plausibly substantiable.


With all its limitations the single-most important indicator of the overall performance of the economy is its GDP growth rate. The average historical GDP growth rate during the 1982-88 period had been 6.5 per cent. For 1988-89 an ambitious target of 6.9 per cent was set. However, only 4.8 per cent could be achieved. In view of this a rather modest target of 5.8 per cent was set for this year. It will not be achieved, with the expected growth rate of 5.2 per cent. However, while this growth rate is far below its historical value, it is higher than last year. The primary reason for this is the faster growth of the large scale manufacturing sector. This sector, although contributes only about 18 per cent to the GNP, has strong links with other sectors which make its growth performance relatively more important.

The government policy of privatisation, deregulation and simplification of sanctioning procedures has been credited for the substantially increased private investment in large scale manufacturing sector in 1989-90. In the 1990-91 Budget major areas opened up for private investment are housing finance, road construction and life insurance. While the direct impact of these policies on specific sectors is yet to be seen, it is the signal which these policies will convey to the private sector which should help to improve the overall environment of private investment.

The major reasons put forth why the target growth of 5.8 per cent in GDP could not be achieved in 1989-90 is the relatively low growth in the agricultural sector. Its growth has been only 4 per cent compared to the historical growth of 5.9 per cent during 1982-88, 7.1 per cent last year and 5.2 per cent target for the year.

The main reason that the GDP growth during the last two years has been significantly below the historical value is perhaps the restraints partly related to the implementation of IMF conditionalities. There is substantial evidence, including the low ADP share of the GDP, which indicate that implementation of the structural adjustment programme is at least partly responsible for the sluggish growth of the economy during the last two years. If this is true then it will be years before the economy gets back to its historical path as the full impact of the conditionalities is yet to come. It is also important to carefully investigate the channels through which the structural adjustment programme influences the economy before pursuing it more vigorously to avoid the possibility of ending up in a severe recession.

Budgetary Position

Looking at the phenomenal growth in debt servicing during the last few years one can understand the impatience of the donor agencies. Debt servicing now accounts for about 41 per cent of the total current expenditure and over the last decade the compound annual growth has been 24 per cent. Total deficit which was envisaged to be Rs. 56 billion for this year, in spite of the restraints, is now expected to be Rs. 65 billion. The external borrowing is Rs. 24.8 billion - a decrease of 20 per cent over last year, whereas the domestic borrowing has increased from 27.1 billion last year to 35.6 billion this year. The net inflow of foreign debt has reduced to only 30 per cent of the gross inflow.

During the 1982-88 period domestic savings as per cent of GDP were in the neighbourhood of 8.9 per cent which is one of the lowest among comparable developing countries. Last year they dropped to 11.3 per cent. This year again they could not rise beyond 11.6 per cent. While there has been a 6 per cent increase in exports, imports remained at last year's level resulting in a reduction in the trade balance by 202 million dollars over last year. There have also been important compositional changes in both exports and imports. While the share of capital goods in imports has dropped the share of manufactured goods in exports has increased most of which is textile based.

During 1989-90 Federal tax revenues are marginally higher by Rs. 10.2 billion than budgeted for Bulk of this increase is due to higher than expected revenues from export tax (Rs. 0.95 billion) and sales tax (Rs. 0.52 billion), which are offset by a shortfall of Rs. 0.56 billion in import duties. Revenue increase as a result of last year's taxation proposals have met with some degree of success. The gain in revenues from income tax has been realized in full. Increase in sales tax is higher than that budgeted for. However, the proposed increase of Rs. 2.19 billion in import duties has not been achieved. An increase of only 0.40 billion has been recorded. Total revenues are about 11 per cent higher than the provisional figures for 1988-89.

In March 1990, the prices of POL products and fertilizers were scaled upwards. It was estimated that this would net a sum of Rs. 1.8 billion. Revised estimates for 1989-90 indicate that only an extra Rs. 0.61 billion has been collected. Target for the year 1989-90 has been more than achieved. Receipts from property and enterprise are Rs. 1.5 billion more than budgeted for, largely contributed by additional trading profits of Rs. 1.2 billion. However, receipts from civil administration are short by about Rs. 0.9 billion, primarily due to a shortfall of Rs. 1.85 billion in the profits from the State Bank. This has no some extent been offset by additional receipts from defence services (NLC).

Trends in 1989-90

During 1989-90 the net capital receipts are 31.5 per cent, or Rs. 12.53 billion, higher than the receipts in 1988-89. This is contributed primarily by an increase of Rs. 21.01 billion in the permanent debt and a decline of Rs. 7.00 billion in the savings schemes. The increase in the permanent debt may be the result of the forced purchase of government bonds by the financial institutions and some diversion of funds from saving schemes to the bond marked. The sudden decline of investment in the special saving schemes is, perhaps, the result of a reduction in the interest rate by 2.5 per cent. Moreover, the withdrawal of sanction for corporate investment into KDCs may have contributed substantially to the decline in investment. The expected privatisation by the government through the divestiture of shares worth Rs. 1.5 billion has not been achieved. Only Rs. 0.27 billion have been realised through the disinvestment of PIA shares.

In 1989-90 there is a decline of nearly 10 per cent in the inflow of aid. There is a reduction of nearly Rs. 7 billion in food aid and Rs. 1 billion in commodity aid which is to some extent compensated for by an increase of Rs. 4.4 billion in grants. In 1989-90 current expenditure of the federal government is nearly 18 per cent higher than the previous year. Debt servicing, defence and law & order are the three highest contributors to the increase. Debt servicing alone has increased by 26 per cent (Rs. 12.5 billion), of which domestic interest payments alone account for an additional Rs. 8 billion - the cost of previous borrowings.

Expenditure on defence rose by 21 per cent (Rs. 10.8 billion) due to Zarb-e-Momin and the border situation and law & order by 19 per cent (Rs. 0.5 billion). All other expenditures, other than subsidies, are lower than budgeted for. The ADP for 1989-90 was fixed at Rs. 56 billion, representing a growth of over 14.5 per cent from the level attained in 1988-89. Actual development expenditure is expected to be about Rs. 55 billion, a shortfall of less than 2 per cent. This testifies to the growth in absorption capacity of the public sector.

Highlights of Budget

Tax receipts, in the absence of any taxation proposals, are projected to grow by 8.5 per cent in 1990-91. Given the in expected nominal GDP growth rate of 13 to 15 per cent this implies that tax revenues tend to grow less rapidly than the economy. The low revenue elasticity of the tax structure explains why ever when the economy is buoyant as in the mid 80s the budgetary position of the government has deteriorated. This also explains why the debt repayment capacity does not increase rapidly. Following the incorporation of the taxation proposals, tax revenues are expected to grow by 15 per cent. Of the Rs. 10 billion projected increase from revenues in 1989-90, the major contribution is expected to be from income tax, federal excise and sales tax of Rs. 2 billion each and import duties of Rs. 3 billion. Changes in the policy of exemption in income tax and the re-introduction of the self assessment scheme and higher tax rates are estimated to yield Rs. 0.96 billion.

Changes in import duties surcharge and the imposition of sales tax on a number of previously exempted items are estimated to net Rs. 4.2 and Rs. 0.60 billion respectively. Changes in the federal excise are projected to yield an additional Rs. 2.12 billion. It is possible that the expected increases in import duties is underestimated because of the continued decline in the value of the rupee and the quantum of under-invoicing of high duty merchandise.

Altogether proposals for FY 1990-91 are estimated to net Rs. 7.87 billion, thus increasing tax revenues to Rs. 135.59 billion, that is an increase of more than 15 per cent over 1989-90. This implies that the Tax/GDP ratio will rise marginally from 13.5 per cent in 1989-90 to 14.1 per cent in 1990-91. The share of direct taxes in overall tax revenues will increase marginally from 14 per cent in 1989-90 to 14.1 per cent in 1990-91, which is a very small change in the right direction.

The rise in development surcharge on POL products was expected to yield additional revenue of Rs. 7.8 billion in 1990-91. However, the budget estimates for 1990-91 reflect only Rs. 1.80 billion as the expected additional revenue from this surcharge. Based on consumption forecasts, we estimate that the total yield from development surcharge alone would be of the order of Rs. 13.18 billion. Thus, the tax revenues are under estimated by Rs. 5.38 billion. If to this is added the trading profit of Rs. 0.5 billion as a result of the price differential incorporated in the 26th March price increase announcement, the total additional revenue available to the federal government is of the order of Rs. 5.88 billion. The under-budgeting of revenues on this account is either due to the expectation that the average price of crude oil will rise to above $ 17 per barrel or that devaluation of rupee will cut into revenues. It appears, however, that the government has been unduly pessimistic about expected revenues from the petroleum development surcharge.

Non-tax revenues

During 1990-91 non-tax revenues are budgeted to yield 10 per cent, or Rs. 4.36 billion, more than last year. For 1990-91 the net capital receipts are expected to be 28 per cent, or Rs. 9.96 billion, lower than in 1989-90. It is expected that the permanent debt will increase by an additional Rs. 18.28 billion, that is 55 per cent lesser than last year. The projected increase of 10 per cent in the savings schemes can only be achieved if the government makes special efforts to do so. However, given the previous record, this does not appear to be feasible. Disinvestment of shares is budgeted at Rs. 3.9 billion. Unless government willingness is genuine, this target appears to be ambitious like previous years. Government proposes to purchase in Rs. 4.11 billion worth of outstanding bonds, compared to Rs. 10.21 billion in 1989-90. Given the previous record of higher borrowing on this account, the target appears to be set very low. The decline of 60 per cent is unlikely to take place.

For 1990-91 the total foreign assistance is expected to be Rs. 2.6 billion more than last year. An increase of Rs. 4 billion in project aid, Rs. 2.8 billion in commodity aid and Rs. 0.8 billion in other aid is expected to be offset by a reduction in the grant component to zero. This has adverse implications on the servicing of external debt in future. Given the expected decline in the value of the rupee, the budget estimates could be higher than actuals. However, there is a need to utilize the Rs. 19.16 billion of project aid more efficiently and effectively to increase the revenue and debt servicing potential from these investments. The under-utilization of project aid in the past, and its misuse has to a large extent contributed to increase in O&M costs beyond the budget's capacity to finance these. Current Expenditure

During 1990-91 projections indicate an increase of 6 per cent in total current expenditure. General administration is expected to rise by nearly 20 per cent, or Rs. 1.20 billion. Expenditure on defence will increase marginally by 2.2 per cent over last year's total of normal expenditures and the special expenditure on Zarb-e-Momin. The actual increase is, however, 23.8 per cent over 1988-89. The decline of Rs. 0.06 billion on law & order appears to be unrealistic given the current law & order situation in the country. Debt servicing is expected to increase by Rs. 8 billion, or 13 per cent over last year's revised estimates. Given the impact of increase in the petroleum development surcharge and the effect of last year's and this year's taxation proposals, salaries have been revised upwards. This is expected to contribute over Rs. 4 billion to 1990-91's expenditure bill. The Annual Development Plan for 1990-91 with an allocation of Rs. 63 billion is 14.5 per cent higher than last year's revised estimates. The increase in the ADP allocation is Rs. 1 billion more than last year's increase. Given the expected inflation rate the increase in the allocation in real terms is not sizeable.

Sectoral allocations in the federal ADP continue to show a reliance on the private sector for investment into industry, where the PSDP shows a decline of 28 per cent. Other sectors with large decline are minerals, where the PSDP allocation is 79 per cent lower than last year, and in education and training, by 17 per cent. The latter clearly indicates the low priority which is being attached to human resource development in the country.

A decline of 41 per cent in the fertilizer subsidy is more than offset by an increase of 71 per cent in irrigation. The allocation to the power sector is the highest in the federal ADP but the increase is only 10 per cent of the increase for irrigation. The modest enhancement in allocation for the energy sector is surprising in view of the problem of loadshedding which is perhaps the major factor restricting the level of industrial production in the country. Allocations for the development of fuels and infrastructure (transport and communications, physical planning and housing, rural roads and model villages, and the federal SDPs) cumulatively account for more than 59 per cent of the total increased allocation for the federal PSDP.

Composition of ADP

We derive below some of the macro-economic implications of the federal budget for 1990-91.

Economic Growth: The annual development programme (ADP) budget for 1990-91 is Rs. 63 billion which is 6.4 per cent of the projected GDP for next year compared to 6.3 per cent and 6.2 per cent for 1989-90 and 1988-89 respectively. Out of this Rs. 14.7 billion is allocated to provinces for their development programmes which is 14.8 per cent higher and goes to social sectors such as health, education and rural development. Another Rs. 5.3 billion is allocated for special development programme (SDP) to meet the development requirements of AJK, FATA and Northern Areas.

The size of Federal Development Programme is thus Rs. 43 billion. Out of this Rs. 33.95 billion (78.9%) will be devoted to physical infrastructure. Rs. 3.4 billion (8.1%) will go to special sector such as health, education and women's development programmes. Rs. 0.65 billion (1.5%) is kept for rural roads and model villages whereas Rs. 3 billion (6.9%) is allocated to peoples works programme. Rs. 1.25 billion (2.9%) is set aside for fertilizer subsidy.

More emphasis is now being given to energy which was not given due importance in the previous government although ADP to GDP ratio was generally higher during that period. Under a tight budgetary condition, the government is trying hard, with some success, to encourage private investment. It will, however, require more efforts to remove the bottlenecks in energy, transport and communication sectors. The overall growth rate target in GDP for 1990-91 is put at 5.5 per cent which seems attainable if there is no major set back to agricultural output and private investment continues to show an improvement.

Impact on Agriculture

The federal budget for 1990-91 has allocated 5.5 per cent of federal development budget to the agricultural sector which is lowest ever. The increased share of water and infrastructure development will assist the development of the agricultural sector but lowering the direct allocation to the sector will hamper the development efforts. In addition, a number of budgetary measures will have a direct impact on the agricultural sector, as follows:

a) The agricultural sector consumes nearly 3 per cent of total petroleum products. Though the level of consumption is low, yet it plays an important role in running tubewells and transportation network. b) The electricity consumption in agricultural sector amounts to 8 per cent of the total. By imposing fuel adjustment surcharges across the board, the poorer section of the population residing in agriculture will have direct as well as multiplier effect of rise in energy prices. This would not only increase the cost of living of the poor but would also hamper the development of small rural industry. c) By including agro services in the structure of income taxation, the cost of rental of agricultural machinery would also increase cost of production and would affect the small farmers, in particular. d) The escalation in the minimum wage rate to Rs. 1100 per month for labour in trade and industry (without being linked to productivity) would further increase the wage differential between agricultural and non-agricultural sectors. This would increase migration to non-agricultural sectors and could exert an upward pressure on agricultural wages.

On the whole it appears that instead of broadening the tax resource base by including agricultural income, a series of indirect taxes have been imposed which would affect all farmers across the board and would lead to higher cost of production.


Total gross investment during 1989-90 is estimated at Rs. 157.7 billion which is 16 per cent higher than last year. The growth in private and public investment has been 19.9 per cent and 12.7 per cent respectively. Investment in large scale manufacturing sector showed an impressive growth rate of 34 per cent. The share of private investment in total investment increased from 50.3 per cent to 51.2 per cent. This trend may be a reflection of increased confidence of the industrialists who no more see any threat to their capital in the long run. The new Peoples Party government has fundamentally changed its attitude to the private sector is concerned. With all its efforts, the military government was unable to convince the industrialists that the days of nationalisation were over. Had the law and order situation improved in major cities of Sindh, the situation could be even better.

In order to enhance the role of the private sector, the government has announced several measures this year. These measures will directly affect private investment but more importantly, will transmit signals to create a more favourable environment for private investment. The government has allowed private sector to invest in housing finance. The new institutions may, however, find it more rewarding to finance luxurious houses, leading to a possible misallocation of resources. The private sector has also been allowed to establish life insurance companies. In the presence of State Life Insurance Company which has so far performed quite well, the response of the private sector is not predictable. The private sector has also been invited to build highways but because of long gestation period, it is unlikely to result in any significant response.

In order to encourage investment in rural areas, the agro based industries will be subject to lower rates of customs and excise duties. It is, however, not clear whether this will enhance the volume of total investment or merely reallocate resources away from the urban centres. In any case the suggested measures are not expected to produce significant results in the near future. Exemption of duty on packing material used in dairy/fruit juice industry will have positive effects on investment. Similarly, tax credit at the rate of 15 per cent for BMR which was withdrawn last year has been reintroduced this year and is expected to encourage replacement investment in industries like textiles. Extension of capital value tax to ADPs, HUFs firms and companies and on commercial property is expected to discourage investment and divert some resources to more productive sectors. To increase production, some other industries such as cement and electronics are also subjected to lower rates of customs duty on capital imports.

However, across the board increase in custom duty rate which has been enhanced from 7 per cent to 10 per cent is likely to have a negative impact on investment. Since a major part of imports consist of capital goods, raw materials and other industrial inputs, the cost of production is bound to increase. The overall adverse impact on investment, and, consequently on the level of output will depend on the aggregate demand conditions in the economy. National savings have increased from Rs. 98.3 billion in 1989-90 to Rs. 123.1 billion in 1989-90 which have financed 78 per cent of the total investment of Rs. 157.7 billion. Implicit in these estimates are the average national savings rate of about 14 per cent of GDP (12.4% in 1988-89) and marginal savings rate of 24 per cent of GDP (compared to 6.5% in 1988-89). Due to this increase in national savings, the share of external resources in total investment has declined from 28 per cent to 22 per cent.


The increase in national savings is a result of substantial increase in private savings. Although savings in unfunded saving schemes were adversely affected by a decrease in rate of return on such schemes, there was an unprecedented and inexplicable jump in the sale of Bearer National Fund Bonds of twenty-eight billion this year. There had been several attempts in the past to entire black money into the formal sector but with only limited success. The net effect on private savings is an increase of about Rs. 19 billion. It is question mark as to from where all this money to buy Bearer National Fund Bonds has come in 1989-90.

The government expects to finance 84 per cent of total expected investment during 1990-91 through internal resources by increasing average national savings up to 15.9 per cent of GDP. It is not clear how, in the absence of any significant improvement in budgetary gap and trade imbalance, government will be able to achieve this target. It seems that the only way to increase domestic resources is through further increase in permanent domestic debt. Domestic debt has already reached an alarming level with an enormous increase in debt servicing. Continued dependence on this source of finance may eventually shatter public confidence in government bonds.


The consumer price index registered an annual increase of 5.69 per cent during July 1989 - March 1990. According to the figures released by the Federal Bureau of Statistics, the rate of inflation during July 89 - March 90 is about 7.5 per cent which is close to the increase in GNP deflator which has been estimated at 7.6 per cent. The rate of inflation could be much higher in the absence of IMF conditionalities which have checked government expenditure on the one hand, and its ability to finance its resources gap through printing money on the other. Instead of deficit financing, the government has relied on domestic borrowing which is less inflationary. However, if the resource gap is not covered through increased level of total tax revenues (which does not necessarily imply an increase in tax rates), the government will eventually have to pay some of the debts by printing money (i.e. through deficit financing) which could be highly inflationary.

An across the board increase (from 7% to 10%) in customs duty and higher electricity tariffs are bound to push the general level of prices upward. The minimum wage of industrial labour has been increased from Rs. 650 to 1100 per month. As the technology (i.e. capital/labour ratio) is fixed in the short run, the industrialists will respond by increasing output prices and not by decreasing the number of workers. However, the extent of price increase will depend on overall demand conditions in the economy. The agricultural wage will also be affected specially if the rural industrialisation programme gains momentum.


Given that the 1990-91 budget is formulated by the people's government the net overall impact of the budget on employment is perhaps disappointing. The budget does contain some measures to promote employment, particularly in the rural areas. These include the whole package of fiscal incentives to promote industrialisation in the rural areas. The government targets to increase/divert a significant part of the total industrial investment to the rural areas. Even though it is felt that the target is perhaps overstated, (see Section IV), to the extent that it materialises this measure will encourage off-farm employment in the rural areas in the long-run. Anticipation of any short to medium run favourable impact may be unrealistic.

What perhaps may have a significant impact on employment is the increase in the minimum wages (Rs. 1100) announced by the government. If this measure is indeed made effective, unlike the announcement made by the Junejo government, it could have a negative impact on the level of employment, particularly in the formal sector. However, as mentioned above, the impact in the short-run is likely to be limited given the lack of scope for substitution of capital for labour in the industrial sector.

Some other fiscal measures that been announced in this budget may also have an impact on the level of employment. These include the increase in excise duty on cotton yarn, man-made yarn and cement. To the extent that such increases will decrease production these measures will affect perhaps the most labour intensive activities in the country, that is textiles and construction. Also, concessions given to encourage capital intensive industrialisation (like tax credit to BMR, reduced import duty on machinery etc.) are also likely to have implications on the level of employment. On the other hand, concession given to the labour-intensive industries, like electronics, and the twofold-increase in the allocation for health in the ADP, a major portion of which is devoted to BHUs, will help generate employment opportunities. Income inequality has been increasing over time in Pakistan and according to official statistics the Gini Coefficient has worsened over the years 1971-72 to 1984-85, from 0.33 to 0.39. This clearly shows that past economic policies have had negative impact on equity. Analysis of the past two budgets indicate that not much was done to improve the situation. Despite some changes in the income tax structure, the fact that agricultural incomes were left exempt, as were dividend income or capital gains with marginal effective incidence of the wealth tax major beneficiaries were the wealthy landlords, big industrialists and big property owners. Introduction of capital value tax (CVT) and increase in the spread of with-holding tax net (CVT) and increase in the spread of with-holding tax net did constitute measures to broaden the direct tax base and hit at the right sections of the population, however, their impact was marginal and much more remains to be done.

Income Distribution

Next year's budget is a step ahead in this direction. Some attempt has been made to broaden the direct tax structure to include the services sector through licence fee and extension of CVT and withdrawal of income tax exemption/increase in rates. It may, however, be noted that as far as the income/corporation tax is concerned much of the action has been to catch the medium to small tax payers and concessions have given to large tax payers. An example is the withdrawal of the panel system on the demand of the big tax payers. Moreover, the withdrawal of the proposal to reassess PIU for the purpose of wealth, taxation is also an indication of lack of political will to put the system on the right track in a big way.

Analysis of some of the other budgetary measures indicates a mixed effect on income distribution. On the hand, there is the announcement of an increase in the minimum wages which might significantly benefit the poorest of the poor. Also, there has been an increase in the taxation of luxury consumer durables like vehicles, air-conditioners, deep freezers etc. which will make the taxation structure progressive. Furthermore, incentives given for rural industrialisation will also have a positive effect on the level of rural incomes in the long-run.

On the other hand, increase in the rates of some broad based taxes like import surcharge, import license fee and plastics etc. are likely to be burdensome on smaller income groups which consume necessities like grain, flour, pulses, plastic utensils etc. Moreover, increase in the duty on cotton yarn and man-made yarn is also like to affect the smaller income groups. Altogether, proposals in the 1990-91, budget have an ambiguous impact on the income distribution in the country. It will be clear only in coming years if they contribute to any reduction in income inequality.

Debt Servicing Burden

Since 1989-90 debt servicing liabilities have become the single largest component of current expenditure. They account for 30 per cent of revenue receipts, 41 per cent of current expenditure and 5 per cent of GDP. The outstanding debt which stood at 150 billion in 1980-81 is expected to rise to 677 billion in 1990-91 with a 19 per cent annual increase. In 1980-81 outstanding external debt constituted 60 per cent of all debt which is expected to come down to 45 per cent in 1990-91. The domestic component which is approaching 55 per cent of the total outstanding debt has been growing at compound rate of 24 per cent per annum during the last decade. The corresponding growth rate in external debt is 14 per cent.

cost of debt servicing have been rising even faster because the higher level of borrowings has necessitated an increase simultaneously in the interest cost. The annual compound growth rate in debt servicing liabilities during the last decade is 24 per cent. In 1980-81 they stood at about Rs. 10 billion and are projected at 69 billion in 1990-91. The debt servicing on domestic and foreign debt has grown at 33 and 23 per cent per annum respectively. The ratio of foreign to domestic debt servicing is now about 1:3.

The effective interest rate on domestic debt was 5.7 per cent in 1980-81 which has risen to 10.7 per cent in 1990-91. The effective cost on foreign debt has risen from 2.4 per cent in 1980-81 to 4.4 per cent in 1990-91. This analysis shows that the overall interest rate on internal debt is significantly higher than that on foreign debt, despite the fact that devaluation of the Pakistani rupee has effectively increased interest and debt repayments. However, payments against internal debt have the advantage that they remain within the economy. The repayment of foreign debt is another component of debt servicing liabilities. This shows an increase of 19 per cent annually for the last ten years. The repayment rate has increased from 2.4 per cent of the outstanding debt in 1980-81 to 4.4 per cent projected in 1990-91.

The composition of domestic debt has also changed significantly during the last decade. The share of floating debt in annual non-bank borrowings has declined dramatically during the last decade, whereas the share of permanent debt has increased from 24 per cent to 55 per cent, most of which is accounted for by the increase in Bearer Bonds. The share of unfunded debt has increased from 24 per cent in 1980-81 in 1989-90 due to increased inflow into Saving Schemes. In 1990-91, due to decrease in sales of Bearer Bonds, the share of permanent debt in total domestic debt is expected to come down to 45 per cent and the share of unfunded debt to increase to 55 per cent.

Analysis of changing patterns in the type of external assistance is another revealing exercise. Such assistance is divided into project aid and non-project aid. The latter is further divided into food and non-food aid. The most productive component of foreign aid, that is project aid, which comprised 58 per cent of the inflow during the fifth five year plan, rose to 68 per cent in the sixth plan, but has come down to 51 per cent in the seventh plan period. The food component part of non-project aid which was only 5 per cent during the fifth plan has increased to 22 per cent in recent years. Non-food commodity aid has accounted for 37, 21 and 27 per cent of foreign aid during the fifth, sixth and seventh plans respectively. Current trends indicate that share of project aid is falling. This will adversely affect the rate of growth in productive capacity of the economy and hence in the ability to repay loans.

Net Inflow of Funds

The new (after interest and repayment of outstanding debt) inflow of foreign debt which was about 60 per cent of gross inflow in 1980-81 will declined to about 30 per cent in 1990-91. The rise in the ratio of outstanding debt to the annual gross inflow coupled with higher interest and repayment of foreign debt are the major causes of this decline. The ratio of net to gross inflow of internal debt has fallen from 29 per cent in 1981-82 to -55 per cent in 1989-90 which means that the payment of interest on old debt is now substantially in excess of the annual level of borrowing. This year government has reduced the rate of interest on savings schemes, which may reduce somewhat the interest cost component but as discussed elsewhere is likely to affect the whole pattern of domestic saving adversely.

Since 1984-85 onwards the overall budget deficit has been higher in magnitude than the ADP which implies that government is borrowing to finance its current expenditure. Borrowing for consumption was 10.9, 9.6 and 9.1 billion in 1987-88, 1988-89 and 1989-90 respectively. The rise in consumption borrowing is a very disturbing aspect of public finances in the country. Such borrowing does not create any debt repayment capacity and escarbates the problem of debt servicing. As a basic budgeting principle, consumption borrowing must be avoided. Taxation proposals must yield enough revenues to eliminate the deficit on the recurring account. It is reassuring to note that in the 1990--91 Budget the government proposes to eliminate consumption borrowing.
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Title Annotation:Pakistan
Publication:Economic Review
Date:Jul 1, 1990
Previous Article:Summary of tax proposals 1990-91.
Next Article:Budget reactions.

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