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Finance ministry on a ‘solo flight’

In the absence of a political leadership, this year’s budget-making exercise is stated to have been limited so far to closed-door, one-stop-shop of the finance ministry. Even the planning commission has been kept at bay.

“We have not been consulted in the finalisation of the Budget Strategy Paper. In the entire budget-making process, the planning body’s role has been limited to participating in project priorities committee meetings, the ceiling for which has already been set by the finance ministry,” said a top planning commission official.

The planning commission had no role or representation in the rebasing of the GDP, which measures the performance of various sectors of the economy and the economic growth rate.

“There is no need to have the planning commission if it has to become a subservient division of the finance ministry, and if its role continues to be that of a project approving forum. Even this is too often compromised, when projects are approved or rejected based on political influence,” said the official.

The finance ministry, precisely the finance secretary, is running a mini-government, in addition to financial affairs like looking after the power sector, railways, Pakistan International Airlines, Pakistan Steel, agricultural subsidies and what not.

“Nobody is interested in (economic) growth in this country,” said a dejected planning commission official, while explaining why no prime minister or president ever wanted to have a detailed presentation or understanding session on the New Economic Framework launched by the planning commission a couple of years ago. The document was approved by the PPP-led cabinet without any productive discussion, and nobody asked what has been its status of implementation in over two years now.

The agenda is driven by international donors, who dictate policies and terms of contract even though they keep more than 80 per cent of the committed funds with themselves, and yet compel the bureaucracy to follow their directives. The finance and economic affairs divisions keep on begging for funds from ‘donors’ without keeping track of where these funds are going, and whether funding commitments are met or not.

There should at least be a simple cost-benefit analysis of what we are getting and what we are committing in exchange. For instance, the total disbursement out of the $7.5 billion Kerry-Lugar programme to Pakistan so far has been a little over $3 billion, spread over three years. But less than $600 million can be traced into Pakistan’s accounts.

The remaining amounts are shared among consultants and contractors appointed by international donors. “Last year, Pakistan received a total of $1.2 billion in foreign assistance, including that from the United States, the World Bank, Asian Development Bank, DFID and USAID. In return, we have adopted whatever report they prepared for us, without doing any homework to determine if they are going to have any positive impact on our overall economy or our people.”

Foreign contractors are running over portfolios of $100-150 million each in Pakistan, but even top officials of the finance ministry, economic affairs and planning commission do not have an idea about their names or their activities.

And nobody has the guts to hold them accountable as to what they are doing and what are the outcomes.

The result is broken infrastructure, incapacitated institutions, and no policy planning for absorbing millions of growing young population. Nobody has questioned how much, if any, of the international assistance has actually gone into the country’s growth sectors. The foreign aid is for foreign consultants and contractors, not for Pakistan. “We are doing too much for too little,” said a senior official.

It is in this background that growth, investment, savings and tax-to-GDP ratios are going down. The ministry of finance’s excel sheet of the medium-term policy framework, among other macroeconomic indicators, targets the economic growth rate, sets the annual fiscal deficit to GDP ratio and the inflation rate for the next three years. How realistic are these estimates is anybody’s guess.

Growth rate targets have been missed over the last few years. In the last three years, GDP growth has remained within a narrow band of three to 3.7 per cent, widely missing the envisaged targets. Over the next three years, growth has been forecast to remain subdued at 4.5 per cent, 4.8 per cent and lastly 5.2 per cent in 2015-16.

Meanwhile, the national saving rate, which stood at 13.3 per cent of GDP in 2009-10, dropped to 13.2 per cent in 2010-11 and 10.5 per cent in 2011-12, and is estimated to clock in at 12 per cent during the current year. Going forward, the saving rate is expected to slightly improve to 13.9 per cent by 2015-16, but there is no economic basis for how this is going to happen.

The investment rate, which stood at 15.6 per cent of GDP in 2009-10, has dropped to 12.6 per cent in 2012-13 and is projected to improve to 13.6 per cent in 2013-14 before reaching 14.7 per cent in 2015-16. But this would still be lower than what it was in 2009-10, according to the finance ministry’s macroeconomic framework.

And the reasons for the improvement in future investment rate are not clear either.

The tax-to-GDP ratio, which has struggled between 8.6 per cent and 9.4 per cent between 2010-11 to 2012-13, is now projected by the finance ministry to grow to 10 per cent, 10.5 per cent and 10.9 per cent in the next three years respectively, or about 0.5 per cent of growth every year.

While the finance ministry projects the fiscal deficit for the current year at 7.3 per cent, independent economists view this as an underestimation.

They would not be surprised if it finally worked out to nine per cent of GDP given the fact that almost all the projections for foreign inflows - PTCL privatisation proceeds, auction of telecom licences, programme financing, international bonds - coupled with over Rs300 billion shortfall in revenue and over Rs300 billion additional power sector financing would make a difference.

As a consequence, deficit financing would continue to increase pressure on higher borrowing, and contribute to the already unsustainable debt servicing cost.

Meanwhile, the current account deficit would continue to remain huge, as the different between imports and exports widens to $20 billion.

How long remittances from oversees Pakistanis provide a safe insurance is yet to be seen.