THE spring season ushers in renewed hopes worldwide but it brings sleepless nights to Pakistan's economic managers as they venture on the thorny path of preparing a budget with infinite demands and scarce resources. This year, the exercise has acquired a political dimension. The PPP has however succeeded in including its old rival, PML(Q), in the coalition government, to have a smooth sailing in the coming budget session of the parliament.

Milton Friedman, a Nobel prize winning neo-classical economist, argues that economic and political freedoms are interdependent and our social and political landscape is largely determined by economic realities. He says it is not possible to have political freedom if economic freedom is not available to individuals.

Pakistan has an elitist economy where rent seeking lobbies have been able to control public policy making. As a result, we have a tax to GDP ratio of about nine per cent which is one of the lowest in the world for the size of our economy.

Under the IMF proamme, Pakistan has agreed to essentially a four-point agenda. One, introduction of VAT styled sales tax, two, reduction of budget deficit to 4.7 per cent, three, extensive energy sector reforms and four, essential financial reforms. In December 2010 after some initial dilly dallying, Pakistan was in no position to meet the IMF performance criteria and, therefore, requested for a nine-month extension of the standby arrangement to which the Fund agreed.

In April Pakistani economic managers visited New York to impress upon the IMF review team with their performance and pleaded for release of the sixth tranche of IMF's credit package. In its latest official note, the IMF has expressed its concern over Pakistan's inability to implement the pledges.

Dr Ehtesham, a former IMF director, recently said Pakistan had been persistently reneging on promises made in the past.

He further claimed that the IMF's loan package in 2008 was made possible by the US intervention. A senior Fund mission will visit Pakistan this month to oversee the 2011-12 budget. An IMF official is also reported to have stated that the upcoming budget was crucial for putting Pakistan's economy back on track and would be keenly watched by the IMF and other donor agencies.

Of late, pressure on Pakistan's burgeoning budget deficit has eased to some extent. The export has increased due to high international prices. Remittances particularly from the crisis-hit Arab countries have also soared. Low consumer and manufacturing demands have slowed down the pace of imports as well. However, such developments often prove temporary and should not be used as indicators of a prospering economy.

According to Finance Minister Hafeez Sheikh the budget 2011-12 would focus on the foremost objective; stabilisation of economy with measures to enhance revenues and minimise dependence on external finances. It seems that this year the IMF would like to ensure that Pakistan addresses the structural weaknesses of its fiscal system.

Recently, policymakers have also tried to send some positive signals to the IMF. When the political consensus over the VAT mode of taxation could not be reached, the government issued a presidential ordinance which aimed at reducing the budget deficit by raising extra revenue. However, the IMF has set its eyes on the budget and the economic realities have pushed the PPP government to forge a new political alliance.

The crucial test is passing the General Sales Tax Bill 2010 in the budget session of the parliament this year. If we fail to generate enough revenue and keep on spending massively on defence and non-developmental expenditures, we shall remain dependent on external resources. The logic is simple. Either we curtail our expenditures significantly; including defence spending or we expand our revenue generation.

Email: hashah9@yahoo.com