By Amir Zia
The News
Sunday, February 6, 2011
A large budget deficit is considered the mother of economic problems. It multiplies public debt, increases interest rates and reduces fiscal space.
We are being told that Pakistan’s economy remains in the throes of a crisis. The fiscal deficit is all set to balloon to 7.5 to 8.0 percent against the targeted 4.7 percent in the current fiscal year if the government fails to mobilise resources and cut expenditures. Inflation, which the government planned to keep pegged at 9.5 percent, is now expected to hover between 15 to 16 percent in fiscal 2010/11 (July-June). The public debt has crossed the red mark of more than 60 percent of the Gross Domestic Product (GDP) or 10 trillion rupees. It was around 4.8 trillion rupees in 2006/07 - when former military ruler Pervez Musharraf started losing his grip on power. This means that in the three years of this democratic rule, total public debt has more than doubled.
What do these economic numbers mean for an ordinary Pakistani? The answer is not difficult to guess — hard times and a grim future! A large budget deficit is considered the mother of economic problems. It multiplies public debt, increases interest rates and reduces fiscal space. That’s what has been happening in Pakistan where social sector and development spending have taken a deep cut.
The government’s desperate borrowing from commercial banks, as is being done in today’s Pakistan, crowds out the private sector from the credit chain, further slowing down the economy and resulting in large-scale layoffs. High government borrowing from the central bank, also being done with impunity these days, compounds inflationary pressure. It directly hits the poor and fixed income group, creating a snowball effect.
The scenario of doom and gloom is being articulated by leading national and international institutions, government officials and experts. The State Bank of Pakistan (SBP), in its first-quarterly report on the country’s economy, warned that any “further delay in implementing the critical structural adjustments” poses great risks. The global lending agencies, including the International Monetary Fund (IMF), mince no words in asking the government to implement the reformed general sales tax (RGST) and reforms in the energy sector.
Finance Minister Dr Abdul Hafeez Sheikh has been pointing out the structural challenges faced by the country in parliament, at various government forums and to the opposition. He has been telling his political bosses, President Asif Ali Zardari and Prime Minister Yousuf Raza Gilani, about the gravity of the situation. But he is unable to make an impact. Political considerations and vested interest continue to dictate economic policies.
Even the opposition and the Pakistan Peoples’ Party’s (PPP) coalition partners acknowledge the seriousness of the issue. But despite all these alarm bells, what is being done to address the situation? Agreed, that there is a lot of noise and commotion, but practically nothing.
It appears a drama of inaction.
The opposition Pakistan Muslim League-Nawaz (PML-N) announced a 10-point agenda in January and gave the government 45 days to implement it. The government welcomed the gesture and started negotiations, but is this 10-point agenda a prescription for the country’s economic ills?
The answer is a big ‘NO’.
Most of the agenda points are political, ranging from the implementation of judicial orders on the National Reconciliation Ordinance and other issues such as an overhaul of the Election Commission. Corruption, action against politically-connected loan defaulters and formation of an independent accountability commission remain some of its key points, but sadly these points have little to do with the economic crisis. The agenda also includes a demand for the reversal of the fuel price hike, which already has been accepted. But the decision costs around 4.5 to 5.0 billion rupees a month to the national exchequer against the backdrop of a steep rise in international oil prices, which hover above $100 a barrel now. It will contribute in widening of the budget deficit.
The demand for slashing 30 percent expenditure makes sense and Prime Minister Gilani remains all set to reduce the size of his cabinet, but the gesture is symbolic as the government lacks political will and commitment to restructure ministries, departments, and the state-run institutions where overstaffing remains rampant. In fact, the government itself contributed in making the situation worse by saddling thousands of more people in some of the already loss-making institutions. The forced reinstatement of employees in the privately-run Karachi Electric Supply Company underlines that the PPP government and its allies remain unable to walk their talk.
No wonder, in the four rounds of talks between PML-N and the government nothing substantial came out. According to an official, who attended these meetings, the crucial issue of resource mobilisation, including the RGST, has not even been discussed. This exposes the moral and intellectual hollowness of today’s ruling elite, which remains hesitant to do what is required of them. It does not want to pitch in their share through taxes nor is it able to provide honest leadership. It demands sacrifices from the people, but is found wanting itself.
The Muttahida Qaumi Movement’s (MQM) recent nine-point agenda includes a demand for the imposition of tax on agriculture income. But the influential lobby of landlords, which dominates parliament, remains bitterly opposed to this idea. The government appears in no mood to face the political fallout of any such decision.
As the country sinks deeper into trouble, it appears there is a stalemate on the economic front. It is a perfect tragedy of delay, where reforms remain on the hold in the name of consensus and nothing is being done to ward off the crisis. Maybe the IMF, the United States and its allies and our Arab friends, despite their weariness in supporting the country for so long, will again push us back from the brink and keep the economy of this lone Muslim nuclear power afloat. If this is the real plan ‘B’ — then we really are a nation with great faith.
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