Budget making and Finance minister’s blues (Daily Times)

Knocking together a budget with no elbow room

By Babar Ayaz

A senior educationist in our university days, way back in the late sixties, once said that a person who is cursed by both parents becomes the president of Pakistan. And yet there is a long list of aspirants who would give their right arm to get this position. If not by both the parents at least you have to be cursed by one of them to become the finance minister of Pakistan.

But wait a minute let’s get our perspective right. There is hardly any country in the developing and developed world where the finance minister’s job is not cursed. The global recession and the financial mess created by the financial institutions, because of unlimited freedom given under the neo-liberal mantra that everything should be left to the gods of free market, is now casting a shadow on the vibrant Chinese and Indian economies also.

Finance Minister Dr. Hafeez Shaikh landed himself in this post, which he had always coveted, in March 2010 when a frustrated Shaukat Tareen bowed out as he was not allowed to implement his reform agenda.

All the finance and economic Pundits agreed that the biggest challenge for Dr. Shaikh would be the head-wind which is traditionally blown by the political colleagues. Though he was no novice for a government job, his last assignment as the Minister for Privatisation did not bring him to cross swords with the parliamentarians which he had to do now. And perhaps quite often.

He is not the first finance minister who has not been able to deliver because of the little financial elbow-room and unrealistic political considerations of the successive governments. A cursory look at our finance ministers’ history shows that starting from the socialist Dr. Mubashar Hasan the political leadership have given a tough time to all finance ministers, with an exception of the all powerful Ghulam Ishaq Khan. His Babu mentality set the economy on the dangerous path of heavy domestic borrowing to meet the non-productive current expenditure. It was evident even in the mid-eighties that domestic borrowing was the bigger ticking bomb in Islamabad. But he angrily dismissed it when this issue was raised by me in Dawn. Today it has blown in our face.

Dr. Mahbubul Haq, who was the man with new ideas, had two brief stints as finance minister but was opposed by GIK and couldn’t do much except opening up the strict foreign exchange domain. He was the first one to fail in implementing sales tax at retail level when the Lahore and Karachi bazaar went on strike. In between many attempts were made even by the military government of General Musharraf. So if the present government stepped back after announcing Reformed General Sales Tax  (RGST) because the political parties which have bazaar – MQM and PML (N) – revolted it is not surprising.

During PML(N)’s two governments Sartaj Aziz and Ishaq Dar were also not able to present any innovative budget which could boost revenues and investment ratio. Gentleman Sartaj Aziz was hooted by some his cabinet colleagues. In the first few years of Musharraf’s regime Shaukat Aziz did bring in some reforms, but his success owed much to the foreign debt repayment relief given to Pakistan by the donors after 9/11.

Dr. Shaikh served as an able Finance Minister of Sindh when he first entered politics. But this time he took the bigger responsibility at the center, when the official economy is being squeezed from three sides. In this environment with no fiscal and political room he has been just muddling through for the last three years.

Before attacking the budget analysts have to take into account at least five major factors: one the country is almost in a civil war – it is facing unabated terrorist attacks in KP, FATA and Balochistan. And the commercial hub of the country has been destablised by the political parties militant wings; two, volatile regional situation has sucked Pakistan deeper in the quagmire because of its foolish national security and foreign policy; three, foreign assistance and investment has shrunk because of our so-called national pride policy;  four, most importantly the coalition government is too weak to take any courageous economic reforms; and five, the country has seen two major floods in the last four years.

So in this situation what should be expected from the finance minister who is beleaguered from every direction, but to present a budget with a huge fiscal deficit? The out-going year has already shown deficit of 7.4%, when all the subsidies of the power and public sector organisations is taken into account. For the 2012-13 he has wished 4.7%. But this is based, of course, on the assumption that the economy will grow by over 4.5%. And it does not include the future burden of public sector enterprises and power sector circular debt.

Greater challenge for this government now is that while foreign assistance and investment inflow is drying quickly, outflow is going up as payment time has arrived. In this situation current account deficit balancing would be extremely difficult particularly when our chest thumping nationalists are telling us to be tough with the US. What does that mean to people? Rrupee to fall further against major foreign currencies leading to high import cost and consequently high inflation.

Like always much of the federal government development budget is to be financed through domestic and foreign borrowings. As it is an election year the political government would not allow any tough measures against the tax evaders. They even backed out from a very genuine reform that the businesses should enter the NTN or CNIC number of the people they do business with or make payments to. The unscrupulous chambers had the gall to demand that this was not possible and the weak government buckled in.

So what is keeping Pakistan’s overall economy afloat? According to a couple of studies done by the micro-economists the size of a parallel or black economy is almost 50% of the GDP. It is this sector which has been doing well come what may. The other factor is that our agriculture has performed well in spite of all the challenges. Some credit can be given to the government also which has taken measures like higher support prices and subsidized fertilizer. The urban-based and urban-biased politicians and media consciously undermine the fact that there has been a huge transfer of money from urban to rural areas – where 60% Pakistanis live.

But on the other hand because of the high level of black economy the country cannot increase its domestic savings rate unless all the tax evaders are pulled in the tax net through a carrot and stick policy.

Another major challenge to the country is the energy sector mismanagement which did cost a loss of over 2% growth in GDP. The country is not that short of electricity generation capacity but it is suffering from electricity theft, non-payments of bills by the public and private sector consumers, low pricing and lack of investment in the maintenance of the existing power generation and distribution system. To put the house in order we need zero tolerance for theft and non-payment of bills to begin with. This needs a strong political will, something which the government is anemic of.

Lastly, Dr. Hafeez’s predecessor Shaukat Tareen had left an unfinished agenda. This agenda was related to improving governance which is neglected by the government; adopting austerity measures by streamlining the government set up which has too many ministries and divisions; push privatisation of a loss-making public sector which is sucking the tax payers money; and as said earlier, implement tax reforms to improve tax to GDP ratio. But because of elections this government has announced that there will be no more privatisation.

What does the entire exercise show? Political expediency and weaknesses are costing billions of rupees to the economy and slowing down our growth. (ayazbabar@gmail.com)

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