The country remains exposed to high inflationary pressures, a precarious foreign exchange situation, a large inter-corporate debt periodically threatening our very ability to fuel our vehicles - public or private sector operated - a very vibrant cartel culture operating unchecked in major essential food groups, and last, but not least, a shrinking investment base that is leading to ever higher levels of unemployment.
To add fuel to the fire is former President Musharraf, acting as an ambassador at large in recent weeks, vociferously defending the present government's policies on the grounds that they are a continuation of his own and are, therefore, a complete vindication of his eight-year rule. To be fair to Musharraf his focus so far has been on defending the government policies vis-a-vis the war on terror and one seriously doubts if he takes any blame for the economic morass his government left this hapless country.
Or, in other words, he regards the current imbroglio as the sole responsibility of the present government. Here the former military dictator may well have a point or two; or indeed three; and depending on which side of the political spectrum one belongs to, maybe even four if one takes into account the growing number of disgruntled in the country today.
Some of the post 1 March 2008 policies that have impacted on the common man are, without doubt, a continuation of the past with some strengthening of the aggravating negative elements during the past ten months or so: a doubling of the inter-corporate debt; sugar, and cement cartels determining prices almost unchecked; rich landlords and stock exchanges remaining exempt from the payment of income tax; slashing development expenditure to meet the budget deficit targets agreed with the International Monetary Fund (IMF); and the perception that nepotism and cronyism continue unabated.
In this scenario to state that the Finance Ministry maybe tentatively engaged in ushering in an era of good governance may well raise the ire of the entire nation; but that is precisely what one has to admit with respect to the Finance Ministry's recent foray into reforming the budget process by linking allocations to ministries with performance.
The major thrust for this policy revision may have come from the Letter of Intent, negotiated between the government of Pakistan and the IMF staff, which was then submitted to the IMF Board for formal approval: "fiscal deficit (excluding grants) is targeted to decline to 4.2 percent of GDP in 2008/09, from 7.4 percent in 2007/08...this fiscal effort is necessary to help reduce the external account deficit, move towards a sustainable fiscal position, and eliminate SBP financing of the government...domestically-financed development spending will be reduced by about 1 percentage point of GDP through better project utilisation."
One percent of 2007-08 GDP calculated at market prices is 58,221 million rupees. Development expenditure earmarked in the current fiscal year's budget announced in June 2008 was 549,709 million rupees; and one percent GDP decline is about 10 percent of total development expenditure earmarked for the current year.
Thus the government, as has been the normal practice in the past, decided to curtail development expenditure in its drive to make the budget deficit sustainable. And first came up with a list of priorities with respect to which development projects were to be slashed. The lowest priority was given to those projects that had not yet commenced and the highest priority was accorded to those that were nearly complete.
There were shades of grey in between but chances that this priority list would be adjusted further in case of a failure to realise the revenue targets was omnipresent. The fact that this has happened may well explain this latest directive from the Ministry of Finance: that all allocations would be linked to performance. It is by default that this policy decision probably encompasses one of the few areas where it can be said that good governance as a policy measure has been supported, though whether it will be practically possible is another matter altogether.
In the Public Sector Development Programme (PSDP) component of the budget allocations are routinely made to all the ministries and divisions. A total of 43 are highlighted in the PSDP allocations in the budget for the current fiscal year (and it is ironical that the number of federal ministers, at present, is double that number).
The disconnect between the number of Cabinet members and the ministries/divisions is reflected in the 2.8 billion rupees budgetary allocation for the Cabinet division, which is seven times the total of the revised estimates of last year's budget ie 398 million rupees. The 2007-08 budgetary allocation was 495 billion rupees. This larger outlay for the Cabinet Division may have accounted for the Prime Minister's earlier decision to have a cabinet meeting in provincial capitals - a policy that has since been abandoned with the rising resource crunch.
Some ministries have quantifiable outputs, which can be easily linked to performance. However there are quite a number where such a linkage is simply not possible. The largest outlay in budget 2008-09 was for the Water and Power Division, around 62.3 billion rupees which, given the state of this sector, inexplicably is lower than the 64 billion rupees budget allocation for 2007-08 and lower in comparison to last year's revised estimates of 66 billion rupees.
The second and third highest outlay under PSDP was allocated to the Food, Agriculture and Livestock and Higher Education Commission respectively. The ten-month rise in food prices linked to cartelisation and smuggling across our porous borders, are the issues that remain with us today, in spite of this higher outlay. And recent press reports indicate that students sent abroad for higher education are no longer being paid by the government and there are funding complaints from our own universities as well. Therefore, one can safely assume that expenditure under this head has been dramatically slashed.
Health division was the fourth largest recipient under PSDP in the budge document and received a rise in allocation of 5.5 billion rupees this year in comparison to last year - a rise that would be endorsed by all.
Pakistan Atomic Energy Commission was the fifth largest recipient of PSDP and is to receive roughly the same amount as last year's total of around 15 billion rupees. Sixth, seventh and eighth largest allocations were earmarked for Finance Division, with little quantifiable output, followed by Planning and Development, Railways and Industries and Production Division.
Looking at the top eight list of recipient ministries/divisions it is patently evident that the linkage between performance and allocation will, in the end, depend on (i) the perceived need by the political leadership of the ministry/division in question, for example Interior, may demand and receive more given the appalling law and order situation in the country, (ii) how much PSDP needs to be slashed further based on our revenue receipts; and (iii) which ministry/division is least linked to a political cost for the government.
To add fuel to the fire, and the fire can be defined as the possible refusal of the IMF to release the second tranche of the IMF loan estimated at 750 million dollars, there is some talk of the government's failure to meet one of the critical quantifiable targeted conditions, namely tax revenue targets. It is being suggested that the government may seek more time to fulfil this condition - a postponement that may be granted given the negative impact on domestic productivity attributed largely to high interest rates which, incidentally, constitute another IMF stand-by arrangement's condition.
Add the severe energy shortage, with obvious repercussions on productivity and thereby on tax revenue, and one has yet another argument for a deferral of this condition. It is no wonder then that there is a constant downward adjustment in terms of meeting the budgetary allocation targets for PSDP in the current year - an adjustment that may well continue till the end of the current fiscal year.
Analysts also argue that the government had earmarked, realising a total of 25,106 million rupees under privatisation proceeds in the current year's budget, money that is unlikely to be realised given the fact that the PPP government has not been working on this aspect of revenue generation and nor is the international climate conducive to investment. Thus the end of further slashing of PSDP is not yet in sight.
The obvious question is does the government has any other option but to slash PSDP? There are always options. Current expenditure can and should be cut and the entire civil service rationalised to enable the government to not only scale down the total number employed but to raise salaries in an effort to reduce the levels of corruption.
Defence expenditure must be curtailed as a priority and the money diverted to provide education and health facilities to all. This would effectively deal with the insurgencies and the law and order problems and eliminate the need for the large outlay for defence that is at present merited by the worsening situation in tribal areas and settled areas.
Revenue must be increased by linking it to the ability to pay, including those in the real estate sector, the rich landlords and the stock exchanges. But the Finance Ministry needs to not only think out of the box for a solution within the next ten years but also convince a self interested political leadership that reforms mean they have to give up their privileged position with respect to income tax exemptions and having large loans from the nationalised banks written-off.
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