Whatever the reaction to it, the budget speech of the federal finance minister provided listeners several opportunities to smile; his pronunciation of some Urdu words was hilarious.
Aside from the momentary pleasure the budget speech provided to the listeners, growth projections for 2004-05 reflect amazing optimism when one looks at what was achieved last year in terms of poverty alleviation, repairing the crumbling social and physical infrastructure, containing unemployment, encouraging higher level of saving, and strengthening investor confidence.
There is no denying the fact that the tight-fisted approach to macroeconomic management adopted by the finance minister contained the fiscal deficit below its 2002-03 level, Pakistan pre-maturely repaid $ 1.17 billion of its external debt, and the cost of debt servicing came down very substantially from 5.5 per cent of GDP to just 3 per cent.
But all this was achieved at a substantial cost in qualitative terms and created a backlog, which may prove hard to cover. It will take a monumental effort to achieve the ambitious goals the finance minister has set for the economy. Let us wish him and Pakistan's economy the best of luck.
Undoubtedly, the disastrous consequences of the choice exercised by Nawaz Sharif on May 28, 1999 placed Pakistan in a tight corner far worse than the one Pakistan found itself in after the 1971 war with India.
Until mid-2002, the management of Pakistan's economy required a great deal of ingenuity, tact, and enormous patience for which the Finance Minister deserves credit. But, along with Pakistan's economic planners, he has to share the blame for not allowing the economy to benefit fully from the flood of cheap resources (rewarded poorly in terms of the returns thereon) that made their way into Pakistan in the aftermath of 9/11.
It is hard to see cheap resources re-visiting Pakistan voluntarily, which makes the budget projections over-ambitious. Economic planners and economists have let the government down once again.
During the whole of 2003-04, they kept telling the government that inflationary rise was within targeted limits capping this claim with the amazing revelation that the number living below poverty line had actually fallen by over 4 per cent while the estimates of international agencies indicated that poverty had engulfed another 1.5 per cent of the population.
This convoluted line misled the government into believing that things were on the mend. It was only towards the end of 2003-04 that the finance minister realized that things were slipping out of hand.
The fact that the 2004-05 budget contains some fiscal relaxations for the poor (a little too many in the finance ministry's reckoning, I guess) indicates that criticism of the fiscal policy in 2003-04 has finally brought the minister around to accepting the harsh ground reality that, in spite of government denials, unemployment and poverty (and all the other social evils that they together give rise to) have reached dangerous proportions.
Overlooking their rising graphs could lead to a serious social upheaval. A highly respected observer went to the extent of saying that had the nation not been split along sectarian and religious divides, by now Pakistan would have been engulfed in a bloody revolution.
According to the Economic Survey released a day before the budget announcement (denying observers a chance to comment on pre-budget scenario in the context of the survey figures) in 2003-04 per capita income rose at a slower pace (12 per cent) compared to 2002-03 (15.7 per cent), average food inflation was up 4.9 per cent compared to 3.1 per cent in 2002-03, average monthly household consumption expenditure went up by whopping 35 per cent over its 2000-01 level, and unemployment went up from 7.83 in 2002-03 to 8.27 per cent in 2003-04.
The decline in these key social indicators is not the kind of foundation on which one can credibly build the hopes of high economic growth. People, who are expected to drive the growth engine, are far from happy. These trends also confirm that inflation remained far higher than its estimates touted by the Federal Bureau of Statistics.
Despite government's efforts to attract the private sector investment into several economic sectors, pervasive despondency limited its rise. Growth in private sector investment therefore stayed at its 2002-03 level.
The proof thereof was the virtual absence of flotation of large new companies confirming the view that the rise of the KSE-100 index was merely the result of speculation. The huge hiccups that the index has experienced (up to 200 points in an hour) in the second half of 2003-04 reinforce this view.
Pakistan is heading for difficult times due to both internal and external developments. Astonishing rise in oil prices, withdrawal of Saudi credit facility for oil purchase, widening of the trade gap to $2.5 billion against the targeted $0.7 billion and prospects of this gap widening further given the incentive to import a host of things at lower tariffs, pre-mature repayment of external loans and the difficulties being faced in raising cheap borrowing from domestic banks hit hard by the extremely low yielding gilt-edged paper sold to them during past two years do not augur too well for achieving the level of self-sufficiency that the budget envisions for delivering GDP growth of 7 to 8 per cent.
Higher growth rate requires substantially higher levels of resources but they now seem hard to come by, except at a realistic price. This is reflected in the fact that against its projected target of Rs15 billion, in 2003-04 the government ended up borrowing Rs54 billion from the banking sector to plug the expanding resource gap, and the bulk of it was borrowed at rising rates of interest as the banking sector realized that it was taken for a ride (for far too long) by the government using the fallacious argument of falling inflation.
Lower profit rates have seriously hurt the sentiment for saving. With foreign remittances steadily tapering off, the banking sector may not be in a position to foot the huge public sector borrowing bill to fund the higher allocations for development projects and the social sector.
Given Pakistan's geo-political situation and the haunting threat of continued terrorism, expectations about non-tax revenues from privatisation of state-owned enterprises, too seems over-optimistic.
It would be a pity that in spite of the Finance Minister's resolves not to avail structural adjustment facilities from the IMF, he may be forced to do so wiping out his efforts that resulted in lowering public sector debt from 75 per cent of the GDP in 2002-03 to 69.7 per cent in 2003-04. But he will have none else to blame except his economic advisors.
Fudging inflation figures was a grave error. It did help lower government's interest payments down to three per cent of GDP from 5.5 per cent a year ago, but played havoc with the government's credibility.
The Minister cannot deny that he was advised time and again by the press not to stretch his luck too far. It appears that even now he can't envision the coming difficulties.
That's why he has doubled the with-holding tax on income from prize bonds and also decided to do away with Special Savings Schemes by converting the savings directorate into a mutual fund corporation whereby savers will be exposed to fluctuations in security prices and the returns thereon.
It is unfair to savers, especially pensioners who can't fulfil the documentary requirements of proving that they are entitled to benefit from the Behbud scheme. Most of them were employed by small and medium sized businesses that don't believe in issuing documentary evidence of any kind for fear of falling into the tax net.
It is wholly unjust to expose small savers to speculative markets because they have virtually no access to sound investment advice. In any case, at present none of the debt investment papers (both private and public) offers a return higher than the real inflation rate.
A poor country like Pakistan needs to inculcate saving, neither consumption nor speculation. There are no two ways about it. But the government has done precisely the opposite.
In the last two years, by forcing profit rates on bank deposits to drop to virtually zero, it has undermined the incentive to save forcing savers to become speculators, many of them ending up losing all they had.
This is a recipe for disaster. Even if the ambitious projections about growth in tax revenues prove right, banks may not be able to fund the expanding public sector borrowing needs.
It is essential that the real inflation rate is built into the market prices to revive saver confidence. Similarly, it is equally important that we stop chasing the EU by trying to contain fiscal deficit below 3 per cent if the economy is expected to grow by 7 per cent, or above, as the Finance Minister seems to believe.
A poor country like Pakistan can and should afford a fiscal deficit 2 per cent below its GDP growth rate to take care of the development backlog that has been created over the decades, especially in the social sector.
It will help re-build peoples' confidence, cut the financial burden that is killing them and energize them to produce more. Growth will then become a reality.
