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Behind the smokescreen

June 01, 2012


People of the country will be required to fend for themselves in a low employment high inflation economic environment. The businesses will need to factor in the cost of ineffective government and strategies accordingly. - File photo

The presentation of the last budget of the longest serving democratic government in Pakistan on the first day of June looks difficult.

In case Dr Hafiz Sheikh sticks to the announced schedule and presents the budget, the uncertainty that surrounds the issue of resource availability undermines the significance of the effort.

The expected theatrics in and outside the assembly on the budget day will not make the grave resource gap problem disappear. The low internal revenue generation is casting a dark shadow on vitals of the economy. The aid blockage by US, premature termination of $11.3 billion IMF bail out plan in September last year and reluctance of friends and multilateral donors to extend support to isolated Pakistan aggravated the economic situation.

Behind the smokescreen created by the pep talk of Dr Hafiz Sheikh at different forums, there are reports that inner circles of the economic hierarchy is already discussing possibility of a financial emergency in the country to ward off a possible hard landing. There is said to be no quick fix solution but the inflow of outstanding billion dollar dues from the Coalition Support Fund can provide a breather for the outgoing and incoming governments over the next fiscal.

The revival of foreign inflows depends on a variety of factors, most immediate being the lifting of the ban by Pakistan on usage of the land route for delivering the NATO supplies in Afghanistan.

The government is quietly renegotiating for another programme with the IMF but expected high 7% current account deficit during the fiscal year closing today against 4.5 % target might come in way of reaching an understanding with the IMF.

Yasin Anwar the State Bank Governor used harsh language this week to warn the government of a possible meltdown in months ahead. He expressed fears of default and hyper inflation if the government fail to mend its ways and continue to resort to unbridled deficit financing.

Unfortunately so far the public discussion has more been focused on income side. The other side of the equation has not been given as much attention. The resource gap can also be kept within decent limits if masked and budgeted expenditure on non productive heads are contained.

“On the expenditure side, the tale is more tragic. The misplaced priorities of a weak government infested with corruption and constantly under pressure from distressed power lobbies give in at the drop of the hat. It compromises its ability to optimize the use of scarce resource. The most important economic document is expected offers more of the same perpetuating the elitist state structure”, said an expert commenting on the issue.

The donors often criticize subsidies of power sector and commodities as a source pressure on state finances. There is also need to reassess the cost benefit of defense budget particularly in context of easing of tension with India.

“The growing stress in the economy is a testimony to the failure of stabilization strategy that focused on revenue generation from a sliding economy. The growth strategy launched last year did not take off also because of absence of ownership for the strategy”, an analyst argued.

Some consider half hearted implementation of structural reforms to be the real culprit. “The PPP legislators because of their landed background oppose farm tax, PML(N) and MQM with constituency in urban centers oppose documentation and bringing the real estate and trading in the tax net. The working class is against restructuring of public sector enterprises. So what does the government do?” another tax expert said.

As for people and productive agents of growth in Pakistan whatever little the budget is expected to offer with one hand will be taken away by the other as falling currency and higher inflation in months ahead may more than neutralize the gains.

People of the country will be required to fend for themselves in a low employment high inflation economic environment. The businesses will need to factor in the cost of ineffective government and strategies accordingly.

Their ingenuity and personal economic struggle, mostly in the informal sector, will continue to lend resilience and keep the wheel of the economy moving despite many ailments that befell the formal sectors because of the government failings.

As for an improvement in internal resource mobilization the leadership will have to take a lead by example. They need to declare their assets honestly and make public their income tax returns to earn the moral high ground to urge others to honour their tax liabilities. The tax system has to be made just and fair. Most importantly the government will have to improve the quality of governance and bridge trust deficit. As long people consider their government financially irresponsible they will not trust and will keep on avoiding taxes.