FROM a small trader in a mini market to a broker or investor at the stock exchange, and from powerful industrialists to sovereign government, everyone, barring a few, maintain double balance sheets.
With this culture striking roots, guesstimates put Pakistan’s informal economy almost at the same size as that of formal economy.
They all hide facts for varying reasons. While traders, brokers and industrialists prepare two sets of registers to record incomes and turnovers to evade taxes, the government takes extra pain to camouflage a true picture of the state of its affairs and the economy.
During the outgoing fiscal year, the government after having missed the fiscal deficit target by a wide margin – 5.5 per cent instead of budgeted four per cent – reported another ‘off-budget’ and ‘one-time’ additional deficit of 1.9 per cent of GDP, putting the overall deficit at 7.4 per cent or Rs1.3 trillion including Rs391 billion on account of debt consolidation and power deficit.
Last year too, it had reported fiscal deficit under two heads— a normal deficit at 5.9 per cent of GDP or Rs1.195 trillion and another 0.7 per cent ‘one-off’ expenditure on account of power sector losses, thus putting the overall deficit at 6.6 per cent of GDP. The previous years were no different. ‘One-off’ expenditure has almost become a norm now.
Interestingly, the real one-time emergency expenditures on flood and earthquakes are accounted for in normal deficits. In fact, given the increasing impacts of climate change and repetition of extreme weather variations, there should be a separate fund to deal with such emergencies. Finance Minister Abdul Hafeez Shaikh concedes that there should be a better and transparent form of reporting government’s balance sheet. He has, however, taken the position that it should be appreciated at the same time that the government was not hiding anything and presenting all facts and figures in an upfront manner even though under different heads.
Finance ministry officials, however, argue that the reason behind putting power sector subsidies and debt consolidation related expenditures under different heads is to identify expenditures that were either out of the control of the current government or the result of the policies of the previous government and to pinpoint to the political leadership and the general public the cost of a certain unaddressed problems like power sector crisis. Otherwise, such huge expenditures would remain unnoticed and remain hidden in overall expenditures.
Almost same is the case with reporting of defence expenditures. In case of defence spending, such transfers are made under a ‘one-line’ allocations. Even these one-liners are camouflaged under many heads.
Given the fact that Pakistan’s defence budget has generally stagnated over the years as a percentage of GDP despite additional expenditures arising of ongoing war on terror, it needs to be highlighted how much of this war or security situation was costing to the federal budgets, while keeping a reasonable secrecy to actual development schemes required for actual defence and related security preparedness.
In next year’s budget, for example, an amount of Rs545 billion has been allocated for defence against current year’s revised estimates of Rs510 billion. What has not been explained by policymakers is the additional amount the security establishment would receive from the United States on account of Coalition Support Fund (CSF) and services rendered by the army personnel to the UN-led peacekeeping missions in different countries.
So is the lack of explanation as to how the additional expenditures would be met if CSF disbursements are not available as has been happening over the last two years even though over $3.5 billion on that account has been outstanding since December 2010. Under existing practice, 60 per cent of CSF disbursements (Rs150 billion estimated for next year) are transmitted to the armed forces and remaining 40 per cent to the civilian administration. If all such heads are put together, the next year’s defence allocations would go beyond Rs900 billion according to a conservative estimate.
While allocations for pensions to the military men under the civilian expenditure – standing at Rs98 billion for next year compared with civilian pensions of Rs30 billion – have been a subject of public criticism, it has to be appreciated, according to one argument, that after retirement even the army personnel become civilians and should by no means be treated as defence expenditure.
On top of that, the explicit and implicit contingent liabilities currently estimated at Rs487 billion for next year are also kept outside the normal budget. Even though, contingent liabilities are possible future liabilities in case of specific occurrences for reasons outside the control of the government, these are not shown in the balance sheet. This is despite the fact that contingent liabilities, according to official explanation, affect credit worthiness as a result of risks covered by a sovereign guarantee.
The government concedes that such off balance sheet transactions could not be overlooked in order to have a holistic view of the country’s fiscal position and unveil the hidden risks associated with obligations made by the government outside the budget. Similarly, reported debt levels of the country may be understated owing to non-inclusion of contingent liabilities – whether explicit or implicit – that may materialise at any time.
The transparent reporting of these liabilities has now become all the more important as such sovereign guarantees no more remain a piece of paper and have emerged as real liabilities with poor performance of the public sector enterprises. This has already started to actually happen on ground as evident from recent decision of the Independent Power Producers (IPPs) to start calling government guarantees as a result of failure of the public sector power companies to pay off their electricity dues or provide committed fuel supplies.
In view of the policy statements of the economic managers for improved documentation of national economy to expand tax base, transparency demands an honest and prudent representation of public accounts every year to provide real picture of the government expenses and its public examination.