A LAW to end the budget deficit in Pakistan after five years may seem a distant goal. But, in a country where budget deficit has been ballooning and political and economic uncertainties make such a goal seem more of a dream, if it can be achieved within five years that will be a fine performance.

Such a goal had been talked about 20 years ago, after Dr. Mahboob-ul-Haq had advocated that strongly as minister for planning and then as finance minister. In fact, since the advocacy of such checks on budget deficit and public borrowing, the high cost domestic debt has risen from Rs448 billion in 1990-91 to Rs1652 billion now-almost four times.

In fact, the amount would have risen higher but for the rigid checks placed on public borrowing by the IMF and the World Bank. The external debt too has increased similarly and would have been far higher than the net debt of $36 billion to-day but for the international sanctions which followed the nuclear explosions of 1998 and then the imposition of the military rule in Pakistan. And the debt might not have been reduced by two billion but for Pakistan’s active participation in the campaign against terrorism led by the US after September 11th. The new law to end the budget deficit has taken the shape of an ordinance and is already placed on the website on the ministry of finance. Finance minister Shaukat Aziz seeks public reaction to that before the end of July so that it becomes the law within three months from now.

It has come before the nation in the form of an ordinance by a military government. Will the political parties which come in to office after the elections uphold the ordinance, make it an act of parliament and seek to wipe out the budget deficit by June 2007. But the purport of the ordinance has the full backing of the IMF and the World Bank and President Musharraf has said the commitments of the military government to the IMF and other international financial institutions will have to be honoured by successive governments. He would try to ensure that through the National Security Council, which he will be heading. Even after the adoption of this ordinance, the country can have a large public debt but not over hundred percent of the GDP as it has been in recent times, but around sixty percent of the GDP which is also a prerequisite of the European Monetary Union.

Meanwhile, Mr Shaukat Aziz has reaffirmed Pakistan will not seek another IMF assistance programme after the expiry of the current three year Poverty Reduction and growth Facility. The IMF conditionalities have become harsher and harsher and Pakistan finds it humiliating to submit to so many of those conditions particularly when the amount received is very small while the current foreign exchange reserve of the country exceeds $6 billion.

The fact is that even if Pakistan is not interested in getting more assistance from the IMF with its rigid over riders, it needs to obtain a certificate of financial good health from the IMF year after to receive adequate foreign assistance, obtain sufficient foreign assistance and to able to raise enough foreign loans. Sound fiscal and monetary management is absolutely essential in future years and the law cutting the budget deficit and paving the way for a budget surplus, is a major step in that direction. The USA, which has been having a large budget deficit, has also made a law prescribing a five year period for ending the budget deficit. But it was able to achieve that much quicker because of the sustained economic boom of the 1990’s. After that, the disposing off of the surplus or dividing that between different contending groups became a major political issue in the US.

In Pakistan too, if economic growth increases, and industry which is the larger tax paying sector develops faster and becomes an even larger tax paying sector and modernized agriculture makes a better contribution to the tax pool, and the Rs100 billion subsidy given to the wasteful public sector is eliminated, the budget deficit can turn in to a surplus soon. But for a long time now the tax revenues have not really been increasing and have usually been for short of the targets. This year for example, while the targeted revenue was Rs 457 billion, the revised estimate is Rs414 billion and so the next year’s target has been fixed at Rs460 billion which some experts say is too high a target.

In terms of providing the mechanism for enduring that the budget deficit is wiped out within five years finance minister Mr Shaukat Aziz has left nothing to be desired. His ordinance says that public debt should be reduced by 2.5 per cent and social sector expenditures are not to be reduced below four per cent of the GDP annually. The ordinance aims at not issuing new guarantees including those for rupee lending, bonds, rate of return, output purchase agreements and all other claims and commitments that may be prescribed from time to time over two percent of the estimated GDP provided that the renewal of existing guarantees shall be considered as issuing a new guarantee.

Deviation from this is permissible in times of serious crisis or grave emergency but only with the approval of the parliament. And to secure that approval the government has to submit before the National Assembly (a) medium-term budgetary statement, (b) annual fiscal policy statement, (c) annual debt policy statement, (d) mid-year economic report, (e) annual state of the economy report. And if the government fails to meet the target of debt to GDP ratio for over two years, the government shall take all necessary measures including the suspension of salaries of the cabinet members, to return to the debt reduction path latest by the end of the two years.

Such steps have been become essential after the total debt servicing cost has risen to Rs.320 billion even after the cut in interest on public debt and next two years debt servicing payments are to be Rs289 billion after further interest cut. Of this, the interest on domestic debt alone will be Rs191 billion as against the expected tax revenue collection of Rs460 billion. Hence, if poverty reduction is to be given larger funds and the development programme is to receive adequate allocation and the social sector is to receive due attention, the elimination of the galloping budget deficit has become essential. And the country has to learn to live within its means.