A total expenditure of around Rs810 billion is being worked out by the framers of budget for 2002-03 compared to Rs751.7 billion of the current financial year after the IMF reportedly agreed on a new 5.3 per cent fiscal deficit target against the existing 5.7 per cent deficit.

The Fund officials are not expressing serious concern on any issue including the disappointingly low revenue collection because of the support today Pakistan enjoys from the United States, the European Union and Japan. This is in that backdrop that the budget planners are trying to mobilise increased funds for the new budget, the thrust of which would be to allocate more resources for the Public Sector Development Programme (PSDP).

According to an official, if all goes well, the PSDP for next financial year would be around Rs150 billion against Rs140 billion of 2001-02. Initially, the PSDP for the current fiscal year was kept at Rs120 billion but it was increased to Rs140 billion when the government received $900 million cash from the United States as part of the budgetary support. Later $300 million were also provided by Japan for the same purpose.

The budget planners are also feeling relaxed as the government does not have to allocate Rs330 billion to Rs340 billion for debt servicing in the new budget after the bilateral creditors rescheduled their $12.5 billion debts for 30 years. It is said that during the next year the government will be paying about Rs150 billion to Rs160 billion as part of the debt servicing to multilateral creditors whose loans can not be rescheduled as a policy matter. Therefore, a saving of about Rs150 billion will be partly available for diversion to the PSDP to improve the weak social indicators.

The defence budget should decrease as a percentage to GDP as had been agreed with the IMF in a written agreement. However, some budget planners maintain that they will have to allocate increased resources for defence keeping in view the threat perceptions in the region. The defence budget will reportedly be kept at Rs 140 billion against the original Rs 131.6 billion of last year which was later revised upward by about Rs2.5 to Rs3 billion.

The budget planners are also working out details as to what should the thrust of the budget for 2002-03. Since the finance minister has said that no new taxes were being contemplated, it is generally expected that the new budget will bring certain relief to the business community and the highly pressed salaried classes.

But interestingly perhaps for the first time the donor agencies are reportedly asking the government to frame the new budget in such a manner that “it should have more pro-poor bias than in the past”.

The thrust on poverty alleviation has changed the whole economic strategy of the government as now there is more emphasis on job creation aimed at substantially reducing poverty both in rural and urban areas: In rural areas by increasing agricultural activities and in urban areas by having more and more information technology related activities.

Since the international agencies and bilateral donors have already done a big favour by contributing a considerable amount in cash, and in rescheduling of $12.5 billion bilateral debts through the Paris Club in the wake of September 11 events, the Musharraf government is being expected by donors to do some thing concrete for improving weak social indicators in the country.

The donors believe that various recent initiatives have not yet impacted the public, therefore there is a need to do some thing so that more people could get jobs and provided adequate health and educational facilities.

But donors do agree with the government that reducing poverty is a long run-challenge, not something that can be accomplished overnight. In the longer term, growth is constrained by the growth of the supply capacity of the economy, which depends upon investment and productivity growth. The present supply side rate of growth in Pakistan may not exceed the average 4 per cent growth achieved since 1992.

The key question, donors ask, is whether policy reforms are going to improve the investment climate and increase productivity growth so as to raise that figure back into the range of 5 to 6 per cent achieved in earlier decades, or even higher. Improved governance— the end of high level of corruption, a more professional civil service with more transparency in its actions, judicial reforms that eliminate delays, police reform that improves law and order, better auditing and accounting— will surely benefit the investment climate, to the extent that these reforms are actually translated into reality.

Poverty-related issues have become more important for the IMF which for the first time has offered highly concessional lending of $1.3 billion to Pakistan.

Finance Minister Shaukat Aziz says that the current PRGF should be the last IMF programme in Pakistan and that the government would manage the external situation on its own specially by increasing exports, remittances and adhering to prudent economic and financial policies. The IMF and the World Bank concede that their strategy for development did not pay in the last three decades and that is why now they are talking about improvement in growth which should ensure poverty alleviation.

The planners may now have to experience a lot more difficulties to increase investment in the next budget specially after the latest waive of violence across the country. The killing of 14 Frenchmen in Karachi is going to cause a painful delay to attract foreigners to come in this part of the world. But there is some consolation in the fact that the US and the West are fully with Pakistan, saying that they would help Islamabad against international terrorism.