THE Fiscal Deficit and Debt Limitation Law is a welcome initiative in the murky history of Pakistan’s fiscal policy. Almost all the countries of the world, developing and the developed, are facing fiscal deficits and there are legislative measures to reduce or curb these deficits.

In the Euro area there is a Growth and Stability Pact, which lays down the maximum limit of three per cent on the fiscal deficit of the member countries. It also provides that if in any year the member has exceeded this mandatory ceiling then in the following year it must reduce the deficit to less than three per cent to compensate for the excess in the previous year.

However, legislative provisions for solving fiscal deficits have not been a success around the world as the economy of any country is subject to unpredictable domestic and external forces and the universal disinclination to increase taxes or reduce expenditure.

In the 1960s Pakistan’s fiscal deficit was 2.1 per cent with a revenue surplus. Public savings contributed to national savings. In 1970s our fiscal deficit was on the average 5.3 per cent and our revenue deficit was 1.6 per cent of the GDP. In the 1980s although fiscal deficit was 7.1 per cent of the GDP on average, the revenue deficit was nominal. The situation deteriorated sharply in the 1990s when average fiscal deficit was 7 per cent of the GDP but the revenue deficit was at an unsustainable level of 2.3 per cent. Revenue deficit is the excess of current expenditure over current revenues and it means that the economy is borrowing not for capital formation but for its consumption. To take the analogy to the family budget, the family is not borrowing for building a house but for expenditure on marriage.

The other side of the coin of the deteriorating fiscal situation is the galloping public debt in relation to the GDP. In 1980-81 the rupee and foreign debt was 67 per cent of the GDP and in the year 2000-01 it had crossed 108 per cent of the GDP. The rupee debt more than doubled from 23 per cent to 55.6 per cent and the foreign exchange debt increased from 34 per cent of the GDP to 58 per cent of the GDP between FY1981 to FY2001. The escalation in the foreign debt is not only due to rising liabilities in terms of dollars but also stemmed from depreciation of Pakistani currency vis-a-vis dollar.

The persistently high fiscal deficits and consequent ballooning of public debt have pervasive adverse effects. Borrowing to cover fiscal deficits raises interest rates, reduces credit spaces and increases the cost of borrowing to the private sector thus discouraging private investment. It also leads to inflation which disproportionately hurts the fixed income group. Inflation also forces devaluation to keep the exports competitive. In FY 2001, debt servicing was 6.9 per cent of the GDP.

While total government revenues were 16.2 per cent of the GDP, that is, over forty per cent of total government revenues. Spending on public sector development programme was squeezed from 70 per cent of the GDP to 3 per cent. Hence overall GDP and social indicators slumped. Political expediency led to fiscal profligacy clouding the entire economic landscape.

In the last two years the revenue deficit has been brought down to less than one per cent of the GDP. In view of the fact that the revenue deficit in FY 2002-03 is estimated at 0.4 per cent, the elimination of revenue deficit by June 30, 2007 is not a very difficult objective. The more important objective is maintaining a surplus after June 30, 2007 onward. The security and other situation in the region make it difficult to maintain and sustain a surplus. The law, however, provides that the government could depart from this target on the ground of national security or natural calamity to be determined by the National Assembly.

The cardinal objective is reduction of public debt to 60 per cent of the GDP by year 2012 in a manner that the public debt is reduced by not less than two and a half per cent of the GDP every fiscal year. The only way the public debt can be reduced by not less than two and a half per cent in every fiscal year is to have a fiscal surplus because even if there is a revenue surplus after June 30, 2007, it should be large enough to finance the entire development programme of the government. The public debt can only be reduced if the GDP goes on increasing and the debt does not go up every year.

This is a very wishful phenomenon and the weakest part of this law is reduction in public debt by not less than two and a half per cent every year without providing a mechanism for doing so. The table showing a reduction in public debt and the means for achieving this reduction should have accompanied the law. The grants and the debt rescheduling which we got following 9/11 are not likely to continue in future.

In Pakistan fiscal discipline has not been maintained because every year the actuals are more than the budget estimates. We have a very interesting provision of supplementary grants, which gives discretion to the finance minister to incur expenditure up to any amount, which is not provided in the budget. It would be difficult to find such a provision in the fiscal systems of other countries.

In the US prior approval of the Congress is required before incurring any expenditure. Despite the gravity of the Iraq situation resident bush had to seek Congressional approval for all expenditure before incurring them. It was therefore necessary that this law on fiscal responsibility should have provided that supplementary grants can only be incurred if these are approved by the Cabinet and are placed before the National Assembly at its next session. Fiscal responsibility is inconceivable without a more stringent provision for incurring non-budgeted expenditure.

The law correctly lays down that social and poverty-related expenditure should not go below four per cent of the GDP. Pakistan’s public expenditure on education has gone down from 2.6 per cent of the DP in 1990 to 1.8 per cent in 2000. Pakistan’s public expenditure on health is 0.9 per cent of the GDP. India has increased its public expenditure on education from 3.9 per cent of the GDP in 1990 to 4.1 per cent in 2000. It is rather inexplicable as to why Pakistan is spending less than half what India is spending on education in relation to the GDP.

Another confusion created in government’s classification of pro-poor expenditure is to include entire expenditure on education, health, population planning, irrigation, land reclamation rural development etc as poverty reduction expenditures. No doubt these expenditures indirectly help in reducing poverty but the government must make a distinction between direct poverty reduction expenditure and indirect expenditures as on education and health.

The direct intervention in poverty reduction budgetary expenditure is through food subsidies, which are roughly Rs 10 billion. Non-budgetary expenditure on poverty reduction is of Rs 5 billion through the Zakat system. The direct intervention programmes for poverty reduction therefore account for 0.37 per cent of the GDP. When less than one quarter of Pakistan’s population was below the poverty line a dozen years ago, we were spending four per cent of the GDP on social sectors.

Now that more than one-third of the population is living below poverty line we need to spend more on education and health and direct intervention for poverty reduction, otherwise our growth rate will not cross six per cent and the present percentage of population below poverty line will not shrink. Hence this minimum expenditure on social sector must be raised from four to five per cent of the GDP.

The law correctly provides that the government should not issue new guarantees including those on rupee lending, bonds, rates of return, output purchase agreements and all other claims and commitments that may be prescribed from time to time for any amount exceeding two per cent of the GDP. This is a wise lesson we have learnt after giving unjustified guarantees on loans by Independent Power Producers (IPPs) and also assuring them a rate of return irrespective of economic uncertainties inherent in every project.

In fact, the law should have provided that the government should not give any guarantee to any private sector project. The foreign investment should comes on its own risks and rewards, as is the case with other countries of the world.

The law also provides that the federal government shall lay down before the National Assembly regular bi-annual statements on budget policy, debt policy, economic policy and fiscal policy. It also provides for the creation of a three-member debt policy coordination office (DPCO).

The objectives of the law are extremely laudable and the finance minister deserves the entire accolade for this innovative initiative in Pakistan. It is very important to face the gravity of the persistent fiscal deficit and galloping public debt. The mechanism of reducing public debt by two and half per cent every year needs to be worked out in details and in figures. The minimum level of social expenditures in relation to the GDP should be raised from 4 to 5 per cent.

It would have been more laudable if this law had also provided for global federal income tax eliminating all exemptions including those on agricultural income. There is no reason as to why income from services and industry is taxed by the federal government while agriculture is very lightly and inefficiently taxed by the provincial governments.

The objectives of this law can be achieved more easily by increasing the tax-to-GDP ratio from less than 12 per cent to 14 per cent — a level achieved by most developing countries in our income range. We have achieved universally acclaimed macro-stability but at the cost of rising poverty and unemployment as indicated by the latest labour force survey. We need to achieve macro-stability with a more human face.

The writer is a former secretary planning, Government of Pakistan.

FASTING means abstinence during the day form eating, drinking and sexual indulgence. Like ‘Salah‘ this ‘Ibadat‘ has remained obligatory in the Shariahs of all the Prophets from the beginning. All the past Ummahs used to observe fasts as the Ummah of Prophet Muhammad (PBUH).

However, in regard to rules of fasting, the number of fasts and the periods required for fasting, there has been a difference among various Shariahs. It has been stated in the Holy Quran: “O ye who believe! Fasting is prescribed to you, As it was prescribed to those before you, that you may (learn) self-restraint.” (2:183)

It appears from this verse that all those Shariahs, which were sent by Allah, have never been devoid of the ‘Ibadat‘ of fasting. Since Allah made it obligatory in each and every period, let us ponder over its importance.

The real aim of Islam is to make the whole life of man transformed into ‘Ibadat‘ of Allah. He must not be free for a single moment from ‘Ibadat‘ i.e. servitude of Allah, in thought and deed. He must check every move in the affairs of his life as to which step he ought to take so as to earn the pleasure of God and which one will entail His displeasure and wrath.

Therefore, the path leading to Allah’s pleasure must be followed and that leading to His displeasure must be eschewed just as embers of fire are avoided.

A man must adopt the course approved by Allah and keep away from that disapproved by Him. When his whole life is suffused with this discipline then only can he be considered as having discharged his obligation of servitude to his Master and as having fulfilled the purpose of “I have only created jinns and men that they may serve Me.” (51-56).

This is also a fact that the real purpose of the religious duties like Salah, Hajj, fasting and zakat having been prescribed for us, in order to train us for a big ‘Ibadat‘. The fact of these acts being prescribed does not mean that you have acquitted yourself of what you owe to Allah if you have done Ruku and Sajdah five times in a day, have suffered hunger and thirst from dawn to dusk for thirty days in Ramazan and, in case you are wealthy, have given zakat every year and have performed Hajj once in a lifetime, and that having done all this, are now released from His servitude to be free to do what you like.

In fact, the underlying purpose of making these religious duties obligatory is to train a person in such a manner as to enable him to transform his whole life into a regular ‘Ibadat‘ of God.

All religious duties except fasting are performed by some outward appearance. Keeping this nature of fasting before you ponder over the fact that how strong is the faith of the man, who keeps fast, in God being the Knower of the unseen. He actually observes fast; he does not stealthily eat or drink anything; even in the severest summer, when the throat dries due to extreme thirst, he does not drink a drop of water; even in the worst condition of hunger, when life seems dropping, he is not inclined to eat anything! See what firm conviction he has in the fact that no action of his can be concealed from Allah, though it may be concealed from the whole world!

How his heart is full of fear of God that he undergoes a severe agony but does not do anything, which will result in breaking his fast! How profound is his belief in the reward and punishment of the Hereafter that for full one month he fasts for at least 360 hours and not for a moment does an iota of doubt enter his mind about life after death! Had he the slightest doubt about the future life, where reward and punishment will be meted out, he could have never completed his fast? When doubt arises, it is not possible for a man to stick to his resolve of not eating and drinking anything in obedience to God’s commandment.

In this way, Allah puts to test a Muslim’s faith for full one month in a year and to the extent a man emerges successful from this trial, his faith becomes firmer. This is, as it were, both a trial as well as training. When you deposit something as a trust with somebody, you are as if testing his integrity. If he proves successful in his test and does not commit breach of trust, he develops greater strength to bear the burden of trusts and becomes more worthy of trust.

Similarly, Allah puts your faith to severe test continuously for one month, twelve to fourteen hours a day, and when you emerge triumphant from this test, further ability develops in you to refrain from other sins. Therefore, realizing that Allah is the Knower of the unseen, you should abstain from breaking His law even covertly, and, on every occasion, you should duly remember that day when everything will be exposed, and, without any consideration, you will be requited good with good and evil with evil.

The month of Ramazan fills the whole atmosphere with the spirit of piety and virtuousness. In the whole nation, piety flourishes. Prophet Muhammad (PBUH) said that: “Every deed of man gets some increment or other from God. One good deed flourishes ten times to seven hundred times. But Allah says: fasting is exempted from this. It is exclusively for Me and I give reward for it as much as I want.” From this Hadith we come to know that all deeds flourish both in proportion to the motive of the doer of the good deed as well as its results, but there is a limit to their development. In the case of fasting, however, reward is unbounded.

Allah says that fasting is made obligatory on you, may be you become pious and virtuous. It is not said that you certainly become pious and virtuous because this outcome of fasting depends on the perception and intention of the man concerned. Whoever will understand its purpose and will try through it to achieve its objective, will become pious to the desired extent, but one who will not comprehend its purpose and will not even try to get at it, cannot hope to gain anything out of it.

Prophet Muhammad (PBUH) explains the real objective of fasting in these words: “Whoever did not give up lying and practising falsehood, Allah is in no need of his giving up food and water.” In another Hadith he says: “Many are the fasters whose fasting does not bring them anything except hunger and thirst and many are those who keep standing in the night but their standing does not bring anything except being awake in the night.” The purport of both these Ahadith is quite clear. It means that being merely hungry and thirsty is not by itself ‘Ibadat‘ but an instrument of performing real Ibadat.

The Prophet (PBUH) has drawn attention to the real aim of fasting thus: “Whoever observed fast imbued with faith and with the expectation of reward from Allah, all his past sins are forgiven.” The reference to faith implies that the belief in God should remain fully fresh in the mind of a Muslim, ‘Ihtisab‘ denotes the man should be desirous of only Allah’s pleasure constantly keeping an eye on his thoughts and actions to check if he is doing anything against the pleasure of Allah.

If, in accordance with these two principles, a person was to observe all the fasts of Ramazan, he will have all his past sins forgiven because even if he was once an unruly and disobedient slave he has now turned fully repentant to his master — and “A penitent is like one who has, as it were, never committed a sin at all.”

In another Hadith it is said: “Fasts are like a shield (just as a shield is meant for protection from the enemy’s assault, so is fasting for protection from Satan’s attack). Therefore when a man observes fast he should (utilize this shield and) abstain from disorderly behaviour. If anybody abused him or quarrelled with him, the person who keeps fast should tell him: “Brother, I am fasting (do not expect from me that I shall take part in such activities of yours”).

The Prophet has directed in other Ahadith that man while fasting ought to do more and more good work and should be eager to perform benevolent acts. Particularly during fasting, he must develop with full intensity a sympathetic sentiment for his other brothers because being himself in the throes of hunger and thirst he can all the more realize what is befalling other slaves of God in their plight of destitution and misery. It is related by Hazrat Ibn ‘Abbas (Allah be pleased with him) that the Prophet used to become especially kind and benevolent during Ramazan. No beggar in that period went empty-handed from his door, and the slaves secured emancipation.

EVEN as the US Senate gave its approval to a budget amounting to a whopping 87.5 billion dollars to “support security operations and rebuilding efforts” in Iraq, a senior senator, Robert Byrd accused the Bush administration of giving insufficient attention to the demands of post-war planning, creating “an erratic, chaotic situation” in the country which it has placed under its military occupation. There could not be a more apt description of Iraq today.

Other senators echoed Senator Byrd’s observations. They appeared to contend that what America expected was a quick turnaround in Iraq and the early return home of American soldiers. This has not happened. Instead, a steady stream of body bags has been arriving in the US.

An average of two to three US soldiers are being killed everyday as a result of the Iraqi dissidents’ attacks on US patrols and convoys. Last Sunday was particularly gruesome for the American occupation forces when one of its state-of-the-art helicopters came under a missile attack, resulting in 15 American deaths.

On Tuesday again, two more Americans were killed in random bomb attacks as the Iraqis‘ violent defiance of the US and its allied occupation force showed no signs of abating. According to US sources, an estimated 141 Americans have been killed since the official end of the war on May 1.

Despite intensive patrolling by the US and allied troops in Baghdad, Tikrit, Ramadi, Najaf and other major towns and their suburbs, militancy against the occupation forces continues. Elements in Iraqi society reputed to be pro-US are also being targeted. A woman member of the interim governing council (set up by the Americans) was killed some weeks ago and a prominent Iraqi judge said to be probing into reports of anti-governing council elements was kidnapped and murdered in Najaf on Tuesday. A day earlier an Iraqi judge was similarly assassinated in Mosul.

While American officials insist that the situation in Iraq should not be regarded as comparable to what American forces had to face in Vietnam, it is generally agreed that the militancy against Americans and their allies in Iraq is gradually hardening. Reports from Baghdad indicate that American troops have come under attack at the rate of 15 to 20 times per day. Ambushes of convoys are said to be a frequent occurrence. There have also been one or two incidents of suicide bombings, like the attack on a UN office the other day. Soldiers engaged in the night patrolling of Tikrit, Saddam Hussein’s birthplace have called their duty a particularly perilous exercise.

Lieut-Gen Ricardo Sanchez of the allies occupation forces conceded in an interview to an American news agency last month that while initially there was a lull shortly after the war was perceived to have come to an end in May, militant resistance has since been on the increase. The coalition forces now maintain that Saddam loyalists have been joined by “criminals and foreign terrorists”, slipping into Iraq from neighbouring countries.

The US authorities believe that Saddam who has survived the war is personally directing the attacks on the coalition forces and their strongholds. To quote Lieut-Gen Sanchez: “The enemy is a little more lethal, a little more complex, a little more sophisticated and in some cases a little more tenacious.”

The task facing the coalition forces has been made all the more difficult by additional forces not being available, contrary to what the Bush administration had hoped. The Turkish army was willing to send reinforcements into Iraq but it has been vetoed by the Turkish parliament. Pakistan has not yet agreed to send its troops to join the coalition in Iraq and with the continued opposition by elements within the Pakistani political setup, it seems difficult to see how opposition to such a move can be overcome. Foreign Minister Khurshid Kasuri has repeatedly stressed that the request for Pakistani troops must come from the Iraqi people themselves — a condition which is not likely to be met.

For the Americans and their allies, the end of their predicament in Iraq is nowhere in sight. Most seasoned observers of the Iraqi situation are agreed that it would not be easy to reconcile the Iraqi people with the action against them spearheaded by President Bush. If Saddam was a tyrant and a ruthless dictator, many Iraqis look upon the US president as a railroading neo-imperialist. They also believe that the ordeal for Iraq would come to an end only if and when Bush is no longer at the helm in Washington.

If it is difficult to visualize how that can happen now, many of them think that Bush will not get a second term in office. It would not be possible for him to live down the reputation of having lied to the American people, which is what many American intellectuals now believe.

The outlook similarly seems forbidding for Britain’s prime minister. The columnist Peter Oborne writing in London’s Daily Mail, not too long ago, went on record to say that while Mr Blair would desperately want to be seen as a “misunderstood man of integrity”, people have learnt that “he is a plausible chancer and a fake whose word can rarely be trusted.” Oborne has quoted Mr Blair’s former cabinet colleague Robin Cook as saying that the prime minister admitted to him on the eve of the war (in Iraq) that he did not believe that Saddam possessed weapons of mass destruction that could strike at British cities and strategic targets.

However, that was the pretext on which Blair joined Bush in the assault on Iraq. Subsequently, of course, it has been established that the allegations against Saddam were utterly baseless. Even allowing for Daily Mail being a tabloid and blatantly anti-Blair, it is difficult to see how Blair can survive for long as Britain’s prime minister.

There is now a growing feeling in the US and also outside that President Bush might want to arrange a quick transfer of authority and pull out of Iraq. This is what Newsweek, editor Fareed Zakaria, has surmised in a recent comment . Discussing the pros and cons of possible quick “Iraqification” of the problem, he says: “There are no shortcuts. Iraq is America’s problem. It could have been otherwise but in the weeks after the war, the (Bush) administration, drunk with victory, refused to share power with the world.”

He goes on to say that the US administration has apparently decided to speed up its timetable to transfer power from about three years for constitution writing and institution setting up to 18 months at most. It is Zakaria’s view that the major resistance to the coalition force’s presence is from Sunnis, and a quick transfer of power has its own dangers and it might even lead to “a weak central government which will encourage the Shias, the Sunnis and the Kurds to retain de-facto autonomy in their regions and fragment the country ...” If Zakaria’s analysis is not altogether off the mark, the situation in Iraq would in due course be vastly more complex than it is at present.

That inevitably brings to mind what the Russian President, Vladimir Putin, said in an exclusive interview to The New York Times last month. When asked if in his opinion US might get bogged down in Iraq for 10 years or even more, he said that could well happen and that there might be a problem for a long time.

To rectify the situation, President Bush has been advised to move “quickly to restore sovereignty to Iraqis and secure a new United Nations resolution that would clearly define how long the international forces are to remain there (in Iraq).” President Bush would be well advised to heed the Russian leader’s advise. He has already procrastinated over the Iraq crisis much too long.