The 2013-14 budget was announced by the PML(N) after only 5 days of assuming power and such a swift move either shows that they had done their homework before hand or simply displays their non-seriousness on a budget exercise, which in recent years has just been reduced to customary announcements fulfilling a constitutional requirement – In the last 7 years not even ‘once’ the final figures have remotely resembled the ones originally benchmarked!
The economy of Pakistan at present seems to be in a 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, that in a 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 also 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%, Inflation rate at 8%, Tax to GDP ratio to increase from 9.9% to 10.6% (FBR revenues to grow from Rs2,007 billion to Rs2,475 billion) and the overall fiscal deficit in the coming year to reduce to 6.30% from 8.8% 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 do able and are in the long term interest of their people – Human Touch. Having said this, obviously they at the same time also want to ensure that the money they lend will one day indeed be returned to them – And this through a realization 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 IMF showed a lot of flexibility and prudence when presented by a sincere reform plan by Enrico Letta. He when seeking funding 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 labor 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 that has now ballooned to nearly 64% 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 which 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, bullet trains etc 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 organizations (PSO) that we already have in place. The key is to first optimize their potential by making them autonomous through a professional management structure and by putting the weight of the government behind them. Indian Railways 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 newspapers ads by the government to directly appoint new PSO heads, which not only negates the very principles of good corporate governance, but also simply 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 the prerogative of the Board 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!
People these days cannot be fooled easily. For example, yes they are impatient for a solution to our energy woes but at the same time they also want to be assured that the menace of circular debt once temporarily finished by printing money (an ultimate burden on the people anyway through inflation) will not reemerge to haunt them again. Energy being at the heart of the economic revival plan, perhaps it will be a good idea to transparently share short, medium and long term plans and again make use professional management structures to implement tough short-term decisions that government on its own may otherwise find hard to exercise. Also, with this sector already laden with numerous scandals in the recent past, it is advisable to avoid at any cost the element of ‘conflict of interest’ for people working on the ‘forward plan’ in the energy sector; the stock exchange may be booming but it does not necessarily spell a ‘good’ for the economy. This Shaukat Aziz yardstick for economic revival proved to be terribly wrong as in our case what it meant was that it mostly represented a bubble, a piling up of mere paper capital and too in a very few select hands, productive funds going into unproductive use represented through untaxed transactional profits while no real value creation was taking place, and it primarily served as a conduit to whitening money thus indirectly aiding the undocumented sector; Is it prudent at this stage to be even talking about FBR’s direct access to personal bank accounts, which could mean flight of capital, a partial run on the banks and an erosion of an already thin savings base in an environment where the banks struggle to keep up with their deposit to lending ratios; not mere lip service but disclosure of real plans on how the government intends to stop using the SBP as a fiscal source in order to allow it return to its basic primary function of managing the monetary policy; why are the sizes of the all budgetary outlays growing much more than the benchmarked inflation and growth percentages in a period when the country is extremely cash strapped; does there exist enough elasticity at present between the interest rate & investment correlation to justify another reduction of 100 basis points? Meaning, will it bring in enough new investment to justify the negative effects on savings, pressure on the Pak Rupee and resultant inflation; and last but not least, given that our present economic impasse to a large extent is stemmed in the prevailing security situation, is it wise for a mature government to even try and link GST increases to outlays on defense/security requirements.
Now one may ask that how does all the above fit into the budgetary announcements? The answer is that unlike 15 years ago we are today in an age of economic connectivity and global inter-linkages where problems cannot be tackled in isolation and the budget is no exception. Direction and perception of things moving in the right direction create their own dynamics in building up an economic revival momentum. What one would like to see is the government to challenge itself. Revenue drives should have been based more on confidence to reduce PSO losses, gradual reduction in provincial grants to burden them to contribute their fair share in improving overall tax to GDP ratio (Indian style), policy endeavors to enhance exports and to stimulate documented economic activity instead of disturbing an apple cart that is already contributing productively, and seeking to lure the non-contributing undocumented sector in the tax net. This budget regrettably tends to do the opposite.
It is important to remember that revenue collection is as much an art as an accountancy exercise and without first undertaking the long overdue structural reforms in the FBR the announced taxation measures tend to further burden the existing tax payers, promote an undesired ‘belly’ taxation curve that unfairly lays the bulk of the burden on the salaried and middle classes, stoke inflation and unleash a wave of corruption by further reducing the distance between the tax payer and the collector – For example, under the current sales tax system the authority of collection, refund and adjudication are all concentrated in the same department and one does not have to look too far back to see that the absence of zero rating stifled the legitimate businesses and even the government at the time suffered since it ended up refunding more than it collected!
Finally, the lack of any innovative approach on important modern day global growth drivers such as green initiatives, currency swaps, etc just goes down to show that perhaps the economic managers are still stuck in the time warp of the 90s. Interestingly, the economic manifesto released by the PML(N) prior to the elections was not only a very comprehensive document but also allayed most of the concerns mentioned above and one fails to see how and why they have deviated so soon from a strategy just recently formulated by their own team? On a positive note, these are early days yet and one hopes and prays that as they go along over the next five years they will be willing to listen and learn!