Economic management amid political pressures
The major issues that have emerged from the debate need to be addressed seriously if the economic development has to be transformed into a sustainable process, rather than being used as an instrument of aggrandising a small and privileged section of the population, which imbibes globalised life styles and keeps itself distinct from those drifting towards or below the poverty line.
Unfortunately, the government continues to turn a deaf ear on the frequent critiques of its policies, dismissing them as cynicism or worse. Not only comments of columnists, investigative journalists and other experts receive short shrifts, but parliamentarians also get shabby treatment from responsible ministers, who fail to answer their queries and comments and are often not even available for a response. This is not the way to make steady improvements in economic management.
While the government wallows in the self-congratulatory aura of success crafted by its economic managers, the quality of data and the objectivity of analysis contained in the official documents have been a persistent feature of the debate. A major reason for the increase in opacity of data and denseness of analysis are the continuing pressures on the government to make its performance look good. The process of review by peer professional groups is absent.
As an outcome of this debate, there is now a widespread acceptance for the need of an autonomous body which would be responsible for producing key statistics relating to the performance of the economy, especially those which can be given varying interpretations or which are the result of ambiguous methodology.
An autonomous statistical commission needs to be established to oversee the statistical system, which would not be subject to any interference from the government.
Such a commission would inspire much greater confidence in the statistical data, particularly GDP, poverty, unemployment and inflation estimates, on which perceptions differ so widely among the public, independent experts and professional bodies than the present statistical arrangements which have become obfuscated as a result of constant intrusion from above.
At present, there exist no effective institutional mechanisms to seek the advice or incorporate and reconcile the research inputs of different government departments, think tanks or universities to help formulate and assess policy options.
The new director of Pakistan’s premier and oldest development economics think tank, Dr Nadeemul Haque, who has rejoined it after obtaining his Ph.D. from Chicago and a long stint at the IMF, has made a useful contribution, albeit indirectly, to the debate.
He has argued for the building a core group of professionals, who through interaction and peer pressure and confronted only “with a minimum of (or no) bureaucratic or sponsor demands” can help create an environment which would replace the current heavy dependence on expatriate advice for policy reform ideas, which is the principal bane of the current economic management arrangements.
However, the creation of such an intellectual network and the “nurturing of local professionals” is likely to be a slow and grinding process and would require drastic changes in incentive structure that would be feasible in the present unstable political and social environment.
Nevertheless, there is an obvious need for putting in place an economic research and policy advisory structure, with an indigenous expertise base, whose recommendations would not only lead to sustainable development, but would also be credible to informed audiences both at home and abroad, rather than to the government’s cheer leaders alone.
Among the substantive issues that have been raised by the budget, apart from the excessive and often implausible claims about GDP growth, poverty and unemployment reduction and inflationary and balance of payments pressures, is the way the government is using the budget for its political ends and the continued survival of itself and its political supporters at home.
The continued external support which has shored the economy since 9/11 has also made it incumbent that the government hold elections in a transparent manner and seek a mandate from the electorate, unlike the sleight of hand used in the 2002 presidential and parliamentary “elections”. An indicator of this pressure, is the House of Representatives’ recommended cut in the US aid to Pakistan for not having done enough to improve upon democracy and human rights.
For this, the government has to resort to US-style pork barrel politics favouring preferred areas and interest groups, which results in the ballooning of fiscal deficits without commensurate benefits to the common people. This is the main reason why the government which had earlier followed rather conservative fiscal policies under an IMF-supported regime of structural adjustment and had agreed to passing a ‘fiscal responsibility law’ keeping a cap of four per cent of GDP, has gone on a fiscal binge.
The leading US rating agency, Standards and Poor has severely criticised the government in a recent report in the following terms: “By relegating fiscal consolidation as a policy objective, the proposed budget will prolong vulnerabilities stemming from Pakistan’s high debt and debt-service burden, while its impact on aggregate demand is set to extend pressures on inflation and contribute to rising external imbalances.”
These remarks will certainly affect the government’s debt raising capacity at reasonable costs that it needs for financing its ambitious mega infrastructure projects, which will aggravate the fiscal deficit to rise further, rising to five per cent of GDP, according to the S&P report.
Of course, deficit financing by itself is not culpable for all alleged economic imbalances, provided that it is undertaken for projects which are productive and yield recurring benefits for the welfare of the people. Its harmful effects can be minimised if the government is capable of raising an increasing share of the GDP as tax revenues. Unfortunately, the current budget does not meet either of these provisos.
A large part of the public spending in the budget are on current government consumption, including the expenditure of hundreds of millions of rupees on acquiring and maintaining a VVIP plane and payment of heavy import duty on bullet proof Mercedes cars, as well as the unrestrained expenditures on official travels of the president, the prime minister, cabinet ministers and their extensive accompanying entourages. Even in the case of development expenditures, the lion’s share goes to mega projects, whose beneficiaries are the politicians allied to the current regime.
On the revenue side, the announced cosmetic measures to expand the tax base through casting the net wider and improving compliance are clearly inadequate in scope. Measures such as an excise tax on financial services, real estate businesses, and franchise operations, and expanding retail sales taxes to a broader category of goods, are expected to yield additional revenue of Rs25 billion (0.3 per cent of GDP), which would fail to increase the expected tax collection for fiscal 2006-2007 above 10 per cent of GDP.
The planned 16.7 per cent rise in tax revenues appears wishful thinking as it far exceeds the 10 per cent average growth for the past six years. No serious attempt has yet been made to tax agricultural incomes or to tap the billions of rupees made in real estate business in the urban areas.
The rampant rise in consumerism in recent years, with perceptible rises in automobiles, cell phones and electrical goods, encouraged by permissive fiscal and easy monetary policies, has also been a significant element of the current debate.
Pakistan is emerging as one of the fast growing consumption-led economies in the world, which, with a weak productive base has resulted in balance of payments and inflationary pressures.
The heavy imports of consumer goods, amounting to $5 billion to the import bill, accounting for almost 40 per cent of the non-oil and non-food imports, are sustaining the economic growth, which is largely jobless and causing widespread unemployment. The growth of consumerism would appear more pronounced if some consumer goods imports like motor cars and mobile phones presently treated as capital goods are re-categorised.
The government’s consumer-led growth strategy has resulted in an external trade deficit which is expected to cross $11 billion this year. The major part of this gap is expected to be met by home remittances, external capital flows and the proceeds of privatisation (in particular PTCL), with some help from the $800 million floatation of dollar bonds and external assistance for earthquake relief efforts, leaving a nominal deficit on the current account that would be met by running down the foreign exchange reserves.
The privatisation deals are beginning to yield diminishing and dubious returns, while defence imports, which are spuriously categorised as capital goods, are increasing and adding to the balance of payments pressures. The purchases of defence hardware in respect of F-16s and fighter jets from China, airborne warning and control systems from Sweden and some Chinese frigates for the navy that will cost an additional $5 billion over the next two to three years, making the external balance situation more vulnerable.
Indeed, the defence expenditures are becoming the Achilles heel of the economy and even senior retired generals are raising concerns about them. Not only do they encroach upon and exceed the expenditures on education and social sectors which have only increased marginally, notwithstanding the announcement to double them this year, there is now widespread demand that defence expenditures be presented to the parliament for detailed scrutiny and subsequent debate, in the same way as expenditures on social and economic items are subjected.
The current budget reflects the growing political anxiety of the regime to keep itself in power by whatever means possible, including the wooing of the electorate with a chimera of growth and false prosperity.
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