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Fiscal fire-fighting

08 June, 2010

By Dr Abid Qaiyum Suleri


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Budget 2010-11 did not bring any major surprises. As expected, the budget was in line with Pakistan`s commitment with the IMF. Many had already read its outlines in the Fourth Supplementary Memorandum on Economic and Financial Policies (SMEFP) that the government submitted to the IMF on May 3.

In line with the SMEFP, the government contained its fiscal deficit to four per cent. Although the term "value-added-tax" was not used, it was announced that the GST would be reformed, with the deadline of Oct 1 set for this purpose. The GST has been increased by 1 per cent and all electricity tariff differential subsidies are eliminated. Power tariffs are being raised retroactively and the unrecovered power-purchase cost for the current fiscal year will also be recovered from the consumers.

There will be no flexibility in monetary policy and the liquidity available to the private sector will remain scarce. Subsidies are being phased out and successful implementation of the public-sector development programme will depend on a successful realisation of external assistance, including the Tokyo Pledges, the Kerry Lugar money and the IMF`s next tranche.

There was a time when we looked forward to the annual budget, because decisions taken in it--for instance, on changes in fuel prices or power tariff--used to have long-lasting impact, at least for the whole remaining year. Things changed and most ticklish issues were kept out of the annual budget, which were then dealt with through mini-budgets.

In order to make budgets more "people-friendly," imported wisdom dictated that the prices of oil, gas, or electricity are kept away from the National Finance Bill. Ingenuous tools like regulatory authorities were invented (with very little political independence), such as the Oil and Gas Regulatory Authority and the National Electric Power Regulatory Authority--so that oil prices or the power tariff can be changed as often as that is required to meet our international commitments without the need for their inclusion in annual budget documents.

This budget is not only painful for the people. It is painful for the government as well, and rather more so. No democratically elected government likes to alienate its voters. The PPP-led coalition will have to face the next general elections and it is mindful of the fact that its economic compulsions are making it extremely unpopular among the masses. However, due to lack of any medium- to long-term economic vision, the present government is compelled to swallow the bitter pill that is called "macroeconomic stability" at the cost of microeconomic development.

The government is facing a crisis of "six Fs" (fuel, food, fiscal problems, functioning democracy, the frontiers, and the growing fragility of the climate), but prioritises its spending on "four Ds" (defence, debt repayment, day-to-day administration, and what goes for development.

Given the current security situation, the government can legitimise its 17 per cent increase in defence expenditures. There is no escape from debt repayment. If we borrow money, we have to return it. The finance minister (the fourth in the last two years) has already indicated that we will have to borrow more from the IMF to pay back the existing loans. The token reduction of 10 per cent in cabinet paycheques will not reduce the expenses of day-to-day administration. It seems that, like always, development expenditures would be axed in case the external assistance and loans do not come through.

Last year we relied on the Friends of Pakistan`s "commitments" to meet our budgetary deficit. Later on, it proved that the Friends of Pakistan were only a political forum, and not a lending group, so we had to slash our PSDP. This time the government is relying on timely disbursement of donor support pledged during the donors` conference in Tokyo in April 2009.

So what is in the federal budget for us? Most commentators think it is an excellent piece of number crunch, devoid of any real meaning. Without a solid and credible baseline and a clear vision, things can never improve. The recently released report of the SDPI, the WFP and the SDC on the state of food security in Pakistan reveals that poverty and hunger are increasing: 48.6 per cent of the population in Pakistan is food-insecure, as are 61 per cent of its districts, and consumption of wheat declined by 10 per cent during last year due to people`s lack of purchasing power.

One of the most salient features of that report is exploring food insecurity-militancy nexus. It is predicted that after Khyber Pakhtunkhwa, Balochistan will be the next hotspot of conflict and militancy–not because of Islamic militants but due to poverty and marginalisation. Whether the federal and provincial governments can address the issue of social injustice, particularly in Balochistan and Khyber Pakhtoonkhwa, remains uncertain.

A budget is a planning tool and if the planning does not address the burning issues related to the common masses, then the budget of little use. Fire-fighting has been the most popular managerial style of all Pakistani governments. Can the present government bank on fire-fighting for its remaining tenure?

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