It was music to our ears that finally a Prime Minister from Pakistan People's Party feels that the government should not be in the business of running businesses and government's role is to be a facilitator for creating a conducive environment for private sector led initiatives to achieve a higher and sustainable growth rate.
Unfortunately, however, Prime Minister Gilani's belief is not shared by some of his cabinet members, who want to slow down the privatisation process, which had already received a severe blow following the Supreme Court intervention blocking the privatisation of the Pakistan Steel on legal grounds.
The court ruled that the Council of Common Interest - a Constitutional advisory framework - must pre-approve the sale of public entities which did not fall exclusively in the provincial domain. Even after overcoming the legal hitch, the environment is still so polluted that putting the privatisation process back on track is going to be a difficult task.
Prime Minister Syed Yousuf Raza Gilani, addressing the bankers in Karachi on Tuesday, said that high growth in macroeconomic imbalances showed that the country was living beyond its financial capacity. Erosion of fiscal management resulted in public expenditure exceeding resource availability. And, excessive borrowing from the Central Bank and demands of foreign exchange market took a toll on forex reserves.
The Prime Minister also pinpointed four major challenges the country's economy is facing, namely: deceleration in growth; rising inflation, particularly food inflation; growing fiscal deficit; instability in exchange rate; and widening of trade and current account deficits.
He said his government is determined to address these issues and restore macroeconomic stability. The Prime Minister has rightly said that these challenges are indeed daunting and are the result of a policy inaction for over a year.
Being an election year and facing agitation on account of judicial crisis, the previous government frittered away the hard-earned macroeconomic stability. Now, to reduce the fiscal deficit from 7 to 4.7 percent, warrants steep adjustment in the prices of POL products and tariff of gas and electricity as well as a reduction in wheat subsidy.
Without a strong parliamentary support for the government, these painful adjustments will be rather difficult to achieve. Does the Gilani-led government enjoy this level of support at this point in time?
The economic challenges facing the nation cannot be met without strong commitment from both PPP and PML (N) to work together towards achieving macroeconomic stability. PML (N) has lent its support to PPP in having the Federal Budget approved by the National Assembly. Logically, PML (N) legislators need to continue the support measures to adhere to fiscal targets.
There can be no dispute that the foremost challenge for the Gilani Government is to arrest further erosion of macroeconomic stability. However, there can be more than one opinion on the magnitude, pace and sequencing of the adjustment process.
As such, it is essential for the coalition government to take into confidence all the parties on the Treasury benches so that differences on other issues, such as those relating to restoration of judges, do not once again lead to policy inaction.
The economic slowdown is very much visible. The 5.5 percent GDP growth target for FY09 looks unrealistic, unless agricultural output reaches record level made possible by adequate monsoon and the farmer gets higher prices for his produce. Low tax elasticity continues to be a threat in meeting the tax revenue target. With no cap on defence spending and without a reduction in the size of the government expenditure while Public Sector Development Programme is still full of leakages, the aim to bring the fiscal deficit down to 4.7 percent, in FY09, can be a daunting prospect.
Directionally, the budget still remains dependent on one-off items. The Shaukat Aziz government could shorten the budgetary gap with higher privatisation proceeds through strategic sale as well as public floatation of public sector entities.
And also, it could keep the current account deficit within manageable limits through global depository receipts of public sector entities and floatation of exchangeable bonds.
FY09 Budget appears to be following the same beaten path without realising that both the domestic and global scenes are still extremely toxic and privatisation proceeds or bond floatation cannot be exclusively relied on. In addition, if at all, full price adjustments go through, inflation would be closer to 20 percent and not 11 percent as envisaged in the budget. And, the economic slowdown could lower the GDP growth to as low as 3.5 percent.
With textile sector facing higher input costs and not having the ability to pass this burden on to its international customers, even the export target will be under threat. The twin deficits of budget and current account continue to loom large, unless, Pakistan can obtain help from the oil supplying countries. Even multilateral help is not assured without meeting the conditionalities of upward revision in diesel prices, gas and electricity tariff and CNG rates.
A broad-based parliamentary support in this context is essential. PPP leadership cannot ignore its coalition partners or continue to postpone resolving thorny issues which are dear to its partners. At the moment policy making appears to be fragmented and unfocused and the economic team led by Prime Minister Gilani, does not provide the confidence to the market that it will be able to successfully meet the challenges the economy faces. All eyes are on PPP Co-chairman Asif Ali Zardari.
He has to work with Nawaz Sharif to overcome the economic challenges, and, jointly seek international help from developed countries and the oil producing countries. The present cold war between the coalition partners on the judges issue needs to come to an end without any further loss of time. Both leaders are also required to closely work with the provincial leadership of Frontier and Balochistan to help restore stability and peace in these two provinces.
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