Our economic woes

The recently released World Bank report titled "Pakistan Electronic Newsletter August 2011" depicts a damning picture of the country's economic management. The challenges facing Pakistan, as identified in the report, are 'on all fronts' ranging from the government's inability to reduce untargeted subsidies (the implication being that the middle and rich income groups continue to enjoy subsidies that need to be targeted to the poor alone) and relying heavily on domestic borrowing, a highly inflationary policy, due to lower revenue collections, as well as lower than pledged external resource disbursements.
The report notes that global recession, ethnic and sectarian strife as well as the conflict in Khyber Pakhtunkhwa, Balochistan and Karachi were contributors to the fiscal and trade deficits experienced by Pakistan. There is little doubt that the economic and security-related policies supported by the present government have not borne fruit.
And while one may agree with the view expressed by the international community that the war on terror is necessarily of a long-term duration yet few would tend to accept the same proviso for the ethnic, sectarian and political strife that is raging in Balochistan as well as in Karachi - a city that accounts for nearly 20 percent of the country's GDP and 53 percent of the country's tax collections. What is a source of serious concern is that the government does not appear to be revisiting these policies in light of their apparent failure.
Additionally, severe electricity shortages and the high rate of interest as a monetary policy tool to check inflation in the country, a policy reflective of an agreement with the International Monetary Fund (IMF) as part of the stalled Stand-By Arrangement (SBA), have been cited by domestic economists as the major reason for declining growth in productivity with obvious fallout on tax collections.
It is not yet clear whether the recent decision by the State Bank of Pakistan to reduce the rate by 50 basis points would be sufficient to propel the wheels of manufacturing, especially given that the country continues to suffer from severe energy shortages. However, local economists are arguing that it may further compromise the government's ability to reactivate the stalled SBA. In other words, lower foreign assistance disbursements may compel the government to increase domestic borrowing - a tool that would further impact negatively on the country's fiscal and trade deficits.
What needs to be done to reverse the current trend is fairly evident to all. From an economic perspective the government needs to slash its expenditure. In marked contrast to what needs to be done the government has, second year running, announced a rise of 15 percent in the salaries of civil servants, a policy that would fuel wage-push inflation second year running.
The government is also unable to control current expenditure, and the excuse that it cannot reduce allocations on defence because of the war on terror, is not backed by budgetary statistics as defence has witnessed a rise in allocation of 50 billion rupees in 2011-12 from the revised estimates of last year while foreign loan repayment is targeted to rise by 116 billion rupees and servicing of domestic debt by 60 billion rupees. True that the government cannot afford not to pay for these two expenditure items, however it must be acknowledged that these expenditure rises are directly attributable to government policy and a lack of success in generating foreign assistance in the form of grants.
Slashing development expenditure last year was undertaken to keep the budget deficit within sustainable levels, though there is a profound argument that contrary to the budgetary claims of 4.5 percent, it has exceeded 6.8 percent due to overstatement of tax collections by 38 billion rupees, the reduction in external resource inflows of 0.9 million dollars and the inter-circular debt. However, reducing development expenditure reduces job creation and further compromises the per capita availability of infrastructure. In short, the recommendation is that current as opposed to development expenditure must be slashed especially in times of a recession.
These homilies are known to economists the world over and there is little doubt that the country's economic team is fully cognisant of what needs to be done to put the economy on track. However, the continued failure of the team to usher an era of sustained reforms is a clear reflection of its lack of political clout and the cabinet's misplaced priorities in so far as putting the economy back on track to recovery are concerned.