26 June, 2013
By Dr Kamal Monnoo
The 2013-14 budget was announced by the PML-N after only five days of assuming power and such a swift move either shows that they had done their homework beforehand or simply displays their non-seriousness on a budget exercise, which in recent years has just been reduced to customary announcements to fulfil a constitutional requirement - in the last seven years not even 'once' the final figures have remotely resembled the ones originally benchmarked.The economy of Pakistan at present seems to be in the grip of numerous challenges ranging from low growth, stubborn inflation, energy crisis, expanding fiscal deficit, persistent current account deficit to an immediate phenomenon of falling foreign exchange reserves at a time when repayments due on existing external loans are staring the government in the face.
Understandable, in such a case their first priority seems to be to chalk out a home-grown economic reforms package and to doctor the national financial statements in a way that they are in sync with what the IMF would demand when it is inevitably approached for additional funding in order to first pay them their due amount of approximately $3.5 billion and then to get their nod to open up options to raise a further $6 billion. The additional amount will be used partially to cover repayments on our other fast approaching payment obligations, plus to keep the proverbial 'in-house stove going'.
Keeping to the borrowing plan, the macroeconomic targets set in the budget naturally indicate an economic revival: growth rate of GDP at 4.4 percent, inflation rate at 8 percent, tax to GDP ratio to increase from 9.9 percent to 10.6 percent (FBR revenues to grow from Rs 2,007 billion to Rs 2,475 billion) and the overall fiscal deficit in the coming year to reduce to 6.30 percent from 8.8 percent of the GDP in the previous year. Surely, when Mr Dar was making his budget speech, he must have been thinking that with the projected fiscal deficit reduced through the long advocated internal revenue generation measures combined with prudent reduction in government spending, an inflation under check and with some sort of strategy in place to tackle the energy and terrorism fronts, both the international lending institutions and the people of Pakistan will be quite pleased. Sadly, neither the people seem pleased, nor the IMF truly impressed.
So, what went wrong? As for the IMF what a lot of people forget is that it is no longer the institution of yesteryears. Of late, a thinking within its management has evolved (by taking into account the past mistakes), which seeks to advocate, to its borrowers, only those reforms that are doable and are in the long-term interest of their people - Human Touch. Having said that, obviously they, at the same time, want to ensure that the money they lend will one day, indeed, be returned to them - and this through a realisation that policies that stir social unrest, in fact, make their lending more and not less risky.
Meaning that, while they still hand down economic management recipes before agreeing to provide funding; however, if good economic managers go to them with an unquestioned first loyalty to their own people's real economic interests they now listen with an open mind. Ironic as it may seem, Italy is the best recent example of such a negotiation where the IMF showed a lot of flexibility and prudence when presented by a sincere reform plan by Enrico Letta. When seeking funding, he refused to compromise on Italy's growth plans and backed his arguments with presenting a plan that honestly had the interest of the common Italian at heart: cut parliamentary pays and perks, unblock the civil justice system, clean up corruption, cut taxes on labour and the productive working class and directly fund youth employment.
Likewise, even our idea of a home-grown package to build a platform for borrowing from international financial institutions is fine, but we will be better served if our budgeted projections are kept less ambitious to increase focus on the common Pakistani. I am still of a firm belief that most of our issues are management related. Pakistanis this time have voted for change and want the previous governmental priorities rearranged. Owing to consistent bad governance in the past, there is a trust deficit with the politicians and, therefore, the onus lies on the PML-N to initiate fresh visionary moves to restore the confidence of the people. With such an unimaginative budget, which carries a lot of pain but no hope, no wonder the people are unhappy and disappointed.
One would have liked to see the Finance Minister also talk about reducing the total debt, which has now ballooned to nearly 64 percent to GDP during the last five years. With future Pakistanis already over their head in debt what one wanted to hear was some medium- to long-term strategy on debt reduction.
Further, the structure of our debt is very imbalanced. Large external debt means that every time the Pak Rupee value erodes our debt mounts further - one of the conditions as we know being laid down by the IMF is devaluing the Pak Rupee. On the internal front, as the government's appetite grows, with it grows the risk on our commercial banks that are getting increasingly locked into the governmental debt trap, with each working day.
Sadly, no mention was made in the speech on capping this aspect; whereas, a lot of rhetoric is being heard on plans for some fancy spending. Metro buses and bullet trains are very good and yes, they do represent spending on public-friendly infrastructure development. But in deficit economies like ours, they either have to be self-sustaining projects or be based on very soft long-term financing that allow such slow return projects the necessary time to gain a strong operational foothold. The short-term focus should instead be on reviving the public sector organisations (PSO) that we already have in place. The key is to first optimise their potential by making them autonomous through a professional management structure and by putting the weight of the government behind them.
Indian Railways, for instance, is the largest employment provider in India, is profitable and provides one of the best services in the world on 'value for money' basis. Even in devising a revival plan for these PSO's, the government seems to be getting it wrong. What we are seeing are newspaper ads by the government to directly appoint new PSO heads, which not only negates the very principles of good corporate governance, but also repeats the mistake of the past. One of the principal flaws in managing these institutions in the past has been the encroachment on the authority of an independent governing corporate board by the government functionaries, and again by taking away its prerogative to appoint the most suitable Chief Executive Officer; the government is repeating the same mistake. It is the formation of sound and competent boards that they should instead be focusing upon and not the hiring of CEO's!
The writer is an entrepreneur and economic analyst.