The right noises

Pakistan has been doing quite well in consolidating its fiscal position in the recent years.
Widening budget deficits which were considered the most endemic problem of the economy have been narrowed to nearly sustainable levels and the Fiscal Responsibility Law has been enacted to ensure the continuation of this process.
Although this achievement came about largely through consistent efforts of the government, the role of multilateral organisations in nudging the government towards it was no less important.
Even now, they continue to point to the weak areas on various occasions with a view to identifying risks and drawing the attention of the government for appropriate action.
The "Pakistan Joint Staff Assessment of the Poverty Reduction Strategy Paper (PRSP)" prepared recently by the IMF and World Bank, seems to be the continuation of the same practice and in the same spirit. It says that the lack of medium-term expenditure framework (MTEF) has made the costing of PRSP difficult and progress in this area constitutes an important challenge.
Though the federal government has started a sector-wise costing exercise, it is limited to just two sectors - education, health and population welfare - sharing only 30 percent of the total sectoral expenditure.
Besides, there are two main downside risks to the fiscal outlook. Firstly, the implied expenditure compression is somewhat ambitious, in particular for reducing transfers to the power sector though it would certainly be welcome, and secondly, non-tax revenues may not reach the projected levels if dividends fall on account of privatisation.
However, according to the Assessment paper, the fiscal framework could have been more ambitious on tax revenues, assuming steadfast and swift implementation of the strong programme on tax administration reforms, including broadening of the tax-payer base, extending the general sales tax further into the service sector and withdrawing remaining exemptions.
If tax revenues exceed the authorities' expectations, this phenomenon may offset the intensity of downside risks and any additional fiscal space can be used to further raise PRSP expenditures, but with enhanced institutional capacity to absorb additional spending.
Fortunately, economic issues have moved to the centre-stage and these observations, we believe, would be given due consideration by policy makers for mobilisation of resources and funding vital projects, including those related to poverty reduction and social sectors.
In his inaugural address at the Pakistan Development Forum (PDF) on 17th March, Prime Minister Zafarullah Khan Jamali said that the economy had made significant progress towards macro-economic stability and growth. Public debt burden and fiscal deficits had been reduced.
The reform process had transformed the economy from a regulated to a more open market oriented economy, with expanded role of the private sector. Big-ticket entities in the oil, gas and power sectors would be privatised and the proceeds would be used for debt retirement and poverty reduction.
Besides, the Prime Minister promised higher allocations for human development, including education, health, drinking water, sanitation and population planning.
Addressing the inaugural session, the Finance Minister also referred to higher growth rates and other positive indicators.
With buoyancy in tax revenues, the fiscal deficit is likely to be reduced to 4 percent of GDP during 2004.
It was recognised that PRSP had brought the social sectors to the centre-stage and pro-poor spending had been considerably increased.
The Finance Minister admitted that the government needs to do more to reduce public sector losses and initiate policies to accelerate private sector investment.
Defending the present level of defence spending, it was pointed out that expenditure on this item had been reduced from 7 percent to 3.6 percent of GDP during the last few years and presently the size of the Defence and the Development budgets was almost equal.
All the players concerned with the management of the economy and its planning, in our view, are making the right noises though at different levels and with varying degrees of emphasis.
Sometimes it has to do more with the kind of audience and the purpose of the discourse rather than dissimilarities in views.
While comparing the observations, the scope of the subject particularly needs to be kept in view.
Authors of the Joint Staff Assessment had to concentrate their attention on PRSP, its funding and the risks and prospects of mobilising resources through various means in order to assess the net availability of financing for PRSP targets in the years to come.
Their observations in this regard appear to be quite valid and in conformity with the recent trends.
While sectoral costing of reforms is just a matter of record and should be expanded to as many sectors as possible within a short period, power sector losses and shortfall in non-tax revenues could pose a serious problem for achieving the PRSP goals.
An open issue, still to be resolved, is the NFC award and how the Federal Government would assure the level and composition of expenditures when sub-national levels assume more responsibility for policy and service delivery.
The proceedings in the PDF, successor of the erstwhile Aid to Pakistan Consortium established in 1963, are usually much broader in scope and emphasise, in general, the theme of infrastructure for accelerated growth.
In a way, however, the two subjects are closely inter-related. A prudent fiscal policy providing adequate resources to the priority sectors could lead to improved infrastructure, skilled manpower, reduction in poverty and social tensions in the society, thus paving the way for sustained higher growth that in turn could provide a solid basis for raising more budgetary resources for PRSP targets.
This would enable the government to meet the expectations of its citizens in a non-inflationary environment.
A vibrant economy with proper emphasis on poverty reduction in our context is obviously the ultimate goal of both the government and multilateral agencies.
A regular interaction and trust between the two has yielded good dividends for the economy of Pakistan in the past.
We are of the view that this relationship should be maintained even after the expiry of PRGF, though the country would not be obliged to implement foreign advice at that stage.
This is essential because of higher level of professionalism in the multilateral agencies and the fact that their views are heeded more carefully by the foreign investors.