PRESENTATION of the budget for the next financial year beginning on July 1 by finance minister Shaukat Aziz in a tumultuous environment is marked by unrestrained official exuberance, deep scepticism on the part of the opposition leaders, and dismay among the unemployed who desperately need jobs.

Such a schism is inevitable when economics in these tough times is looked through a shattered political prism and the political leaders too easily revert to the old charge of fudging the figures which Shaukat Aziz denies he would ever do.

But when the government suddenly raises the growth figures for the current year to 5.1 per cent from the earlier 4.5 per cent and the projection for growth for next year to 5.3 per cent from 5 per cent, and then goes back to raise the growth figure for last year to 3.8 per cent from 3.6 per cent — all at one go — the political leaders and the economic experts are bound to become sceptical.

The finance minister makes things worse when he says the unemployment and under-employment figure is 10 per cent. How can he make that claim when Germany admits having 10.7 per cent unemployment, Belgium 11.4 per cent, Spain 11.4 per cent and France 9 per cent? These are outright unemployment figures. And if we add up our unemployment figures, the seasonal or occasional employment figure that number may be 25 to 30 per cent, particularly in the rural areas. But since we do not take unemployment of the poor seriously we do not take the real unemployment and under-employment figures together seriously.

Anyway, at a time when our critical economic figures are being disputed, including the poverty figures instead of strengthening our statistical division, the next year’s financial allocation for it has been reduced to Rs 51 million from the current year’s Rs 183 million, while the Planning Commission’s allocation has been raised from Rs 60 million to Rs 509 million, without explaining the reasons why. Are we going to have more of a planned economy or more of a privatized economy? Any way we would need a strong statistical division with larger funds for accurate data-collection when official figures are too often seriously disputed.

Shaukat Aziz’s competent stewardship of the economy at a very difficult time cannot be disputed. But the claim that the new budget has imposed no new taxes has no great merit. Almost every finance minister had said so in recent years and then increased the taxes during the course of the fiscal year in the name of rationalisation, regularisation, or rounding off etc. Similarly, his assurance that there will be no mini-budget is of no significance. This is another theme song of all finance ministers. The fact is the scope for additional taxation if not there, if the economy and the people have to breathe.

When it comes to sales tax which is to bring Rs 233 billion next year no new tax will be levied. Instead the exemptions will be withdrawn next year — as many as on 39 items. In addition, the rates of GST on them will be raised from 15 to 20 per cent.

The same is being done in respect of income tax. Twenty income tax reliefs are being taken away and those who pay this tax will pay in full now. The tax gain from this will be Rs 70 million.

Sartaj Aziz, before he relinquished his office as finance minister, had said the country had 102 federal, provincial and local taxes which must be reduced if the economy is to be revived. And when Shaukat Aziz became finance minister he promised to reduce the federal taxes to three — income tax, sales tax and import duties and shrink the number of provincial taxes to 7 or 8. Since then a few taxes have been reduced, not many. Hoteliers in the country recently protested they had to pay 30 taxes which made the industry uneconomic. In such an environment the scope for mini-budget is not there.

And whenever the electricity rates, gas charges or telephone tariffs are raised the people shout a mini-budget had come. But the finance minister argues the people had to pay for what they consume and also what others steal. But the government does not pay its own power bills. Hence the top officials consume a lot more of power.

This is a very good year for the finance minister. After a long time he has collected all the revenues he had projected for the current year. And that encourages him to opt for Rs 52 billion more of additional taxation for next year and even after he has given away Rs 17 billion as 15 per cent rise in salaries of all federal government officials and allocate more as pensions to the retired.

He will also resort to bank borrowing or printing of notes for Rs 21.90 billion, and he expects total aid of Rs 159 billion. He has promised that the aid or loans will not be used for current consumption but for projects.

But when he talks of the Rs 160 billion annual development plan being 31 per cent higher than last year’s allocation under PSDP he means the actual use out of the Rs 134 billion earmarked last year. The actual utilisation was much too small. So what is the guarantee the same will not happen this year as has been happening over the years?

Such under-utilisation can also affect the poverty reduction programme for which Rs 185 million has been allocated. If there is a real setback to both the development outlays unemployment will increase and poverty will rise. We just cannot afford that.

If on one side we don’t have development funds and on the other side we do not utilise what we have, and yet pay interest on the committed loans, it is case of multiple folly, which cannot be allowed to last.

In spite of such bungling with aid and its under-utilization we have to repay Rs 256 billion, of which the interest on domestic debt alone comes to 170 billion. And that in spite of the write off of loans, rescheduling of loans and reduction of interest rates and the slashing of interest on domestic loans. The total debt servicing next year will be Rs 256 billion is excessive. Let us hope that the 1.8 billion dollars of left-over bilateral US loans will be written off during the forthcoming visit of President Musharraf to the US.

The private sector will be the engine of growth now, says the finance minister. He has come up with a number of concessions for it including making Gwadar a tax-free area and a real economic centre. Even otherwise the private sector has to be an engine of growth in this age of globalization and mobility of foreign capital. He has come up with concessions for foreign investors as well as overseas Pakistanis, and he is to give real encouragement and fiscal assistance and monetary support to the small and medium industries.

Agriculture too is to receive support. And to promote employment quick he is relying on housing which may help about 40 industries, and construction. But housing will take time. The builders will have to mobilise capital. The initial capital of around 40 per cent for house holders and completing the documents will take time. The provincial governments have to come up with land at concessional rates which the Nawaz Sharif government could not do and hence his housing scheme failed.

The housing schemes may take a year or more to pick up steam. Negotiating bank loans, except in the case of government employees, may also take time.

In the interval the government has to give greater attention to its many infrastructure schemes. Otherwise the country may face far more unemployment suicides, which must be avoided. When the private sector and the foreign investors are slow in coming in, the public sector has to play a far larger role in employment-creation. And those who come up with industrial units that create a large number of jobs have to be encouraged and assisted. There was a time when employers who had a number of employees were taxed, beginning with ten and 20, and now it is the time to reward those who create a larger number of jobs. The US is having a pattern of economic revival without job creation. Over-populated Pakistan cannot afford that pattern of economic revival.

Poverty alleviation is to receive Rs 185 billion next year against which will be 15 per cent more than what was allocated for it this year, says Shaukat Aziz. And that will be in the areas of education, health, population planning, water supply, sanitation, rural development and housing.

But the budget overall is being dubbed as elitist, particularly because of the heavy reduction in the import duty on over 1800 cc cars which are not manufactured here but imported by the rich from abroad. There has been no clamour for it. Instead there has been a demand for re-conditioned cars and reduction of duty on Pakistani-assembled small cars.

Although so much is being said officially on the importance of developing agriculture only Rs 1.5 billion has been allocated for this vital sector. The allocation will rise from Rs 797 million to Rs 1.5 billion in the annual development plan of Rs 160 billion or under one per cent. If agriculture is to provide far more jobs the allocation for it should have been far larger.

The total resources of the government next year would be Rs 805 billion, and out of that external aid will be Rs 159 billion. But out of that project aid will be only Rs 44 billion and non-project aid Rs 115 billion. Printing of currency notes or bank borrowing will provide Rs 27.8 billion and privatization Rs 10 billion, as it did in the current year.

After the debt servicing of Rs 256 billion next year and the defence outlay of Rs 160 billion instead of Rs 146 budgeted last year, there is the cost of running the civil government of Rs 63 billion, including pensions of Rs 27.6 billion. Add to that the enhanced pensions and rise in salaries by 15 per cent from July 1. The budget is being called elitist as instead of providing for a salary rise of 10 per cent for those above grade 17 a 15 per cent rise has been given.

Without such concessions the budget next year would have a deficit of 4 per cent of the GDP which is moderate. If we negotiate further debt reductions on a large scale, particularly with the US the debt servicing cost can come down below 33 per cent.

As the officials have stressed what matters after achieving macroeconomic stability is to sustain that. And that demands political stability, law and order, good governance and clean judicial practices which have all been missing.

NONE of the characters involved in Pakistan’s latest political crisis play what could be described as positive, constructive roles. Be it President Musharraf, Prime Minister Jamali, or the stalwarts of the PML-Q, PPP and PML-N, the predominant trait in all their performances is self-interest. Across the board, personal agendas are being prioritized over the national interest.

In President Musharraf’s case, an obsession with keeping the reins of power firmly in his own hands has prevented him fulfilling his promise to restore democratic rule. The prime minister has sold his soul for an empty title; he is little more than a mediator between his ‘boss’ (the president) and the politicians. All of them are striving to get the best deal they can in return for cooperating in General Musharraf’s democratic charade. The PML-Q is already acting out its assigned role, while the PPP and PML-N are stubbornly holding out for a deal on the return of their exiled leaders (so far, thank God, General Musharraf is refusing to accept their terms).

A truly unsavoury cast of characters, but they seem positively heroic when contrasted with the corrosive role of the Muttahida Majlis-i-Amal (MMA). The MMA so far has fulfilled all the worst stereotypes of ‘mullah rule’. The sheer irrelevance of its actions defy belief.

The MMA owes its power to a fluke of circumstances. In previous elections, the Pakistani electorate uniformly rejected self-appointed redeemers and their obscurantist nostrums. The MMA was only able to reverse that pattern in last year’s poll by taking advantage of the widespread anti-US sentiment and the negative campaign conducted by the military-led regime against the ‘secular’ PML-N and PPP. The latter created a political vacuum that was filled by the Islamists. The vote for the MMA was thus actually not a vote for the MMA, but a vote against the US, Benazir Bhutto and Nawaz Sharif.

Having won power by this back route in the NWFP and partly in Balochistan, one would have expected the MMA to be grateful for the unexpected opportunity and do its best to prove to a generally sceptical public that ‘mullah rule’ cannot be that bad after all.

In its electoral campaign the MMA had clearly signalled its intent to ‘Islamize’ Pakistan. Last week voters in the NWFP found out precisely what that meant. The Shariat Bill, passed unanimously by MPAs either too ideologically committed or too frightened to oppose it, introduces such ‘Islamic’ injunctions in the NWFP as the veiling of women in public; closure of cinemas, circuses and music shops; replacement of trousers and shirts in school uniform with shalwar and kurta; and interest-free banking.

The first point that strikes one as one works one’s way down the list of injunctions in the Shariat Bill is how utterly trivial they are. The second is how utterly divorced they are from the real needs, demands and priorities of the people of the Frontier. One should recall here that the Frontier is one of the most backward provinces in Pakistan in terms of human, social and infrastructural development indicators. Much urgent work needs to be done to improve its roads, health care, educational institutions, to provide basic facilities like sanitation, electricity, gas and phone lines, and to create jobs and foster economic growth.

These are the primary functions of any government, be it federal, provincial or local, ‘secular’ or ‘Islamic’: providing security and development for its people. The MMA has wilfully turned its back on these fundamental government functions, and chosen instead to focus on irrelevancies like music, the veil and school uniforms.

There are two possible explanations for its neglect of the basic issues: either the MMA does not have the ability to tackle them properly and produce results, or it genuinely believes that enforcing the veil and silencing music are more important than providing jobs, education and health care. The former would make the Shariat Bill a handy cover and distraction from the MMA’s evasion of governmental responsibilities. The latter implies an agenda for the Talibanization of Pakistan. It is hard to say which casts the MMA in a more unfavourable light.

By using the Shariat Bill as a camouflage to hide its lapses and failures in more pertinent areas of governance, the MMA is only making a bad situation worse. Because all the ‘distraction strategy’ will do is to compound the misery and suffering of the people of the NWFP by imposing an ultra-puritan environment on top of their already socio-economically deprived situation.

Using the Shariat Bill to ‘Talibanize’ Pakistan is a violation both of the MMA’s governmental mandate — nowhere do the functions of government include regulating private religious practice — and the essence of Islamic teaching. Islam provides for some measure of societal observance of religious rites (closing everything for Friday prayers), but these norms are already being properly followed in the Frontier as elsewhere in the country. Islam does not provide for regulation of individual religious practice. The decision about whether or not to pray, whether or not to cover one’s face, etc, has been left to each believer.

By trying to enforce these personal Islamic injunctions by law, the MMA is acting in disregard of the very spirit and essence of Islam — voluntary submission to the will of God. The Holy Quran is emphatic on the fundamental principle when it says: ‘There is no compulsion in religion.’

One of the main criticisms made against the LFO is that General Musharraf imposed it on the country. The MMA is at the forefront of demands for the LFO to be passed, amended or rejected by parliament. But if it is wrong to impose a political system from above, it is infinitely worse to impose a belief system. If General Musharraf is guilty of behaving in a heavy-handed dictatorial manner, the MMA is even more so.

Should the MMA be genuine in its desire to introduce ‘Islamic rule’ in Pakistan, it would do well to follow the example of (among others) the Ikhwan-ul-Muslimeen in Egypt, Hezbollah in Lebanon, and Hamas in Palestine. All of these strongly Islamist organizations enjoy huge popular support. In a free political environment they would probably win elections hands down. The secret of their success? - social welfare. Ikhwan, Hezbollah and Hamas do not simply preach Islam: they practise it in its truest sense by helping their fellow citizens. All three organizations run basic health clinics and primary schools, and otherwise provide relief to desperate and impoverished people. It is through this humanitarian assistance that they win hearts and minds to Islam.

Not surprisingly, the MMA’s ‘Talibanization-before-development’ strategy is guaranteed to have the opposite effect: turning people against obscurantist rule. In the public mind such rule will — indeed, already has — become synonymous with ignorance, regression, mismanagement, instability and anarchy.

For there is a very real danger that the Shariat Bill (and the Hisba Bill that threatens to follow it) will unleash a wave of ‘vigilante Islam’: zealots feeling free to enforce whatever narrow notions and interpretations they have of an Islamic system and way of life. The demonstrations in Multan last week were a foretaste of things to come.

The MMA and the image of Islamic government will of course suffer because of its actions, but so too will national stability. The political standoff over the LFO has been a big obstacle to effective governance and development. This new religious controversy further erodes the chances of a political agreement, and further increases the possibilities of drastic action by the president. The only guaranteed outcome of that is instability, paralysis of governance and economic decline. Lost in their narrow agenda of so-called Islamization, the MMA leaders have little concern for the long-term harm their policies could cause.

Whatever his failings — and there are many — President Musharraf deserves full credit for his address to the Lahore Bar on Sunday. Pakistanis do not want a theocratic state, they do not want Talibanization. It is up to the president to follow those determined words through with equally determined action. The MMA’s ‘Islamization’ experiment — an object lesson in how not to implement an Islamic system — cannot be allowed to drag this country down.

THERE is a need to downsize the government by means of its steady withdrawal, especially that of the federal government, from many of the functional responsibilities that it has taken upon itself. The functions so relinquished should either be organized by the private sector or should be hived off to lower formations of government by reducing the multiplicity of agencies engaged in similar activities.

In particular, the government continues to devote a disproportionate share of its resources to activities that would be more efficiently looked after by the private sector. All this, combined with endemic governance problems, has resulted in accumulated losses of public sector enterprises crossing Rs. 400 billion with an annual addition of almost 1.5 per cent of GDP to this number.

It was assumed that lower interest rates (the average rate on lending having come down by close to six percentage points since June 2001) would provide a stimulus to both production and consumption and hence counter the recessionary symptoms in the economy. Commercial enterprises were expected to borrow at low interest rates to expand productive activities while consumers were expected to be lured by bank credit on easy terms to buy consumer goods like motor cars, motorcycles, air conditioners, freezers, etc. There were increases on both counts, although much more prominently in the case of the latter.

A disturbing feature of the improved availability of credit and higher industrial growth this year is that whereas in theory, deregulation and liberalization should result in investment in sectors in which we have a comparative advantage, in our case, it has led to investments in the manufacture/assembly of motor cars and motorcycles (growth in excess of 45 per cent over last year), refrigerators (23 per cent), TVs (59 per cent), polyester, sugar (14 per cent) — in none of which we have comparative advantage.

For far too long have exports been viewed more from the point of view of their importance to our balance of payments than in terms of their role in economic growth. With GDP expected to grow by five per cent and export growth for the year estimated at around 21 per cent, if exports had not increased at this pace, GDP growth would have been below 4.7 per cent.

Unfortunately, this budget has not done enough to support exports. There are essentially the worn-out, hackneyed, promises that customs clearance of goods would be ensured within 48 hours, that GST refunds would be processed on a timely basis, that the effectiveness of the duty and tax remission on export scheme will be improved and that private enterprises would be subjected to a gruelling sales tax audit only once a year. The quantum of benefits expected to accrue will depend on the manner and effectiveness of these measures.

That exports continue to be limited to a few items and that some of the ‘increase’ in exports was, in fact, money held abroad by resident Pakistanis remitted in the garb of exports are another matter and not the subject of discussion here.

What will be the impact of the budget on the environment for private investment? Apart from the perennial questions of political instability, poor law and order and the chequered history of policy consistency and predictability, the institutional reforms required to create an enabling environment for private investment are yet to be fully spelled out and implemented.

The expectation that as the government reduces its role in the economy, private domestic and foreign investors would step in and revive investment in the real economy has proved to be misplaced. This hoped-for outcome has actually not come to pass. The government has been left waiting for private investment. It has made desperate attempts with poor results to shift the responsibility for investment from public agencies to private enterprises. The gaps in investment programmes left by the fiscal retrenchment have not been filled by the private sector. Private investment has so far remained subdued at 8.5 per cent of GDP compared with 9.2 per cent throughout the 1990s. As a result, the economy has not returned on a growth path on a steady and sustainable basis, as had been promised after the much publicized structural adjustment programmes.

The whole premise underlying the stabilization programme was that consumption would be cut and taxes increased and the resulting increase in domestic savings would bring about a macroeconomic balance. There has been niggardly achievement on this front. On the contrary, the drastic scaling down of public sector investment has deepened the cut-back in industrial production since demand in many sectors continues to be sluggish.

Lower interest rates, though a welcome development, alone cannot change the environment for industrial growth. Banks have been reluctant to extend more credit because of lack of credit seekers wanting to invest in bankable projects. A better, though somewhat extreme, example of this phenomenon is Japan, where short-term interest rates have been zero for some time but the economy is in recession and facing a credit crunch. We know that banks are today flushed with funds. But the paradox is that bankers want to lend to high quality borrowers who are not looking for credit, but are denying credit to those who need it but are perceived as risky customers. Hence, the banking system appears to have become a sophisticated post office for transferring household savings to government at lower interest rates.

Moreover, a moot question remaining unanswered is that with interest rates on deposit having fallen below the rate of inflation, as is the case currently, why would people place their money in the banking system?

It will, admittedly, take time to remove the structural problems that constrain investment - that of lack of an adequately diversified portfolio of skills and a narrow export base, but there are several other irritants that need to be removed speedily to facilitate private investment. Other than subdued domestic and international demand, the regulatory environment and the predatory behaviour of government agencies and functionaries continue to discourage private sector investment.

The cost of doing business is high in Pakistan. Onefifth of the time of entrepreneurs is taken up in dealing with different government departments and agencies. The cost to register a business is 44 per cent of the per capita income, compared to zero per cent in New Zealand, one per cent in the US and UK and four per cent in Norway. Contract enforcement takes a year compared to less than 100 days in New Zealand, Australia, Norway and the UK, while the cost of enforcement is 46 per cent of per capita income compared to one per cent in the US, UK and Canada and eight per cent in Australia.

Finally, a major hurdle to growth is the legal system and the dysfunctional and outdated bureaucratic mechanisms which not only cause delays because of the emphasis on procedures rather than on substance but are also unable to respond quickly to the demands of rapidly changing international trading systems.