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Opportunity, challenges

May 20, 2013

When the Pakistan Muslim League-Nawaz assumes power after nearly 14 years later this month, it would trigger a fire-fighting exercise to halt the fiscal downslide before moving on to a reform process for economic revival.

Senator Ishaq Dar, tipped as the party’s finance minister, will present the next year’s budget which, analysts believe, would set the stage for fiscal consolidation.

If his past track record is any indication, Senator Dar would bring all the off-book hidden expenditures on the table to come clean on what he is inheriting from the caretakers and the PPP government like he did in 2008 by presenting a consolidated fiscal deficit figure at about 7.5 per cent.

Dar has an edge over his predecessors as he enjoys the confidence of the party leadership that would be required to fix the major economic challenges. Unlike Shaukat Tarin and Abdul Hafeez Shaikh who were seen by many party parliamentarians as ‘outsiders’, (limiting their ability to convince PPP leadership on the needed policy direction), Dar would generally get a smooth sailing and support of the party.

This gives Dar little chance to make mistakes because any failure would fall entirely on his own shoulders. He would, of course, also have the policy input and advice of the veteran Sartaj Aziz who is being tipped as Prime Minister Nawaz Sharif’s senior adviser on economy and foreign affairs.

And unlike PPP that had to change five finance ministers in five years of its rule creating a general sense of instability, the PML-N has enough room for continuity and stability of economic policies. It would be expected to take difficult economic decisions like expansion in revenue base, increasing tax-to-GDP ratio, containing public sector losses and creating job opportunities to a growing number of young population through better investment policies.

Given its past record and the election manifesto, the PML-N is expected to push through the economic reform process including deregulation, liberalisation and privatisation it introduced in 1991 and continued after 1997.

The party has committed to making national economy the centre-piece of its priorities and would reorganise its trade and business relations with many of the hitherto neglected regional players like India, Saudi Arabia and the Middle East on top of strengthening economic relations with major western powers.

This would be part of the overall policy to reverse the existing trends of low growth and high inflation. Hence it would be expected to make interest rates congenial for borrowers to kick-start investments in key areas for generating job opportunities.

But how the new finance minister puts together a team of bureaucrats to implement its policies would be seen with keen interest. To start with, the new finance minister is unlikely to enjoy good working relationship with Governor State Bank of Pakistan Yasin Anwar considered a personal choice of President Asif Ali Zardari. However, there is little he can do given Anwar’s tenure will continue until October 2014.

Likewise, he did not have best of relations with incumbent secretary finance Dr Waqar Masood Khan in 2008 and is likely to put together a new team of federal secretaries to run finance, economic affairs and planning divisions and appoint a chairman of the Federal Board of Revenue.

The PML-N would be facing a challenging fiscal deficit situation. Although, caretakers put current year’s fiscal deficit at about 7.3 per cent, indications are that anything below eight per cent would be a blessing given the fact a major part of power sector losses still remain un-quantified and would need to be brought on books.

According to stipulations, Dar is expected to take measures that could reduce budget deficit to about 4.5 per cent next year and stabilise it around four per cent over the next five years.

Going by the PML-N manifesto, Dar would initiate measures to finally reduce current expenditures, excluding salaries, pensions and allowances by one- third and cut losses of PSEs for their ultimate privatisation. He plans a major part of investments to come from the private sector in the shape of public private- partnership given limited fiscal space available in the budget. But his most challenging job would be to reduce subsidies to bleeding power sector that consumed over Rs1.5 trillion in the last four years.

Over the last five months, the gap between power tariffs approved by the National Electric Power Regulatory Authority (Nepra) and applicable rates to consumers has widened from about Rs3.50 per unit to about Rs6 per unit, entailing total additional impact of about Rs200 billion. A major part of this would have to be passed on the consumers in the form of higher tariffs while focusing on losses, theft and recoveries from the public sector consumers as articulated by the party in its election manifesto.

Indications are there that the office of federal adjustor would be strengthened for at source deduction of provincial electricity dues against their shares out of federal divisible pool with a one-time loan to the provincial governments.

This may soon be followed by handing over of distribution companies of Wapda to provincial governments with all responsibilities to ensure timely recovery of electricity bills and reduction in system losses, to put the companies to stand on their own feet and bear the burden of subsidies.

The estimates for foreign inflows and their sources would be one of the significant determinants of the strength of the next year budget. Given the fact that most of the estimates relating to foreign inflows have remained unmet this fiscal year, Dar, having past experience, would have to start the effort from where he had left in 2008. That would involve floating of bonds and divesting of government shareholding in key public sector companies and banks that were shelved on the instructions of President Asif Ali Zardari.