The year 2009 came to a close with two key macroeconomic indicators showing some definite improvement in comparison to last year. The budget deficit is now definitely sustainable. This is in spite of the fact that the government had to request the International Monetary Fund (IMF) for some latitude in its failure to meet the agreed target by 0.3 percent of the Gross Domestic Product, according to the third review under the Stand-By Arrangement (SBA).
The IMF agreed and recommended the immediate release of 1.2 billion dollars. This release has brought total disbursement under the SBA to 6.54 billion dollars. The remaining 4.81 billion dollars, under the SBA, remains to be released in tranches to Pakistan. This injection stabilised the country's foreign exchange reserves, as well as provided support to the international rupee value.
Inflation also has come down from the high of 25 percent last year to less than half by the end of 2009, largely due to the State Bank of Pakistan's strict adherence to the IMF programme with respect to high interest rates as part of a tighter monetary policy, zero-lending to the government and pursuing a flexible exchange rate policy, amongst other policy decisions.
However, the overall impact on the common man of improvements in the budget deficit, as well as inflation remained, at best, unnoticed. The reason is three-fold. First and foremost, the country was subjected to high prices of critical commodities, attributed to cartelization.
Thus the sugar, cement and wheat crisis was an outcome of a flawed market system that was allowed to dictate prices, a system that other countries vigilantly guard against. Additionally, the oil/gas and electricity sector's IMF-dictated reform policies led to a massive rise in their price as the government began withdrawing subsidies and moved towards full cost recovery - a move that led to a dramatic increase in utility bills, as well as transport costs.
While such reform measures are considered essential to ensuring the long-term financial viability of the country's poorly managed utility corporations, yet the public was subjected to not only higher bills than in the past, but also to load shedding that in some areas was as high as 12 to 14 hours.
This lethal combination, high load shedding, coupled with higher bills, was not acceptable to many and led to riots in several cities. The government's response, in this regard, has not satisfied many, as part of the blame for massive load shedding is due to the government's continued failure to deal conclusively with the circular debt, which is continuing to compromise the ability of the sector to pay for crude from the Middle East.
Second, the high interest rates discouraged borrowing, which in turn, had implications on the country's output and employment levels. While the State Bank of Pakistan was on course with respect to most of the reforms, as agreed with the IMF staff, yet due to vested interests, it has yet to take steps to transfer the balances held by various government ministries and agencies in commercial banks (amounting to a hefty 10 billion dollars) and transfer them to its Single Treasury Account and close these accounts.
Third, the government did successfully decrease the budget deficit, largely, by slashing development expenditure. Critics allege that this was made possible as the government had raised the budgetary allocation for development in nominal terms only - or by an unachievable 54 percent over last year.
Tokyo pledges that are still to be disbursed to Pakistan were estimated at 14.5 billion rupees in the budget and thus 20.9 billion rupees out of a total budgetary increase of 35 billion rupees in development expenditure remains not backed by resources.
In addition, the government's capacity to meet its domestic tax revenue targets is also unlikely to be met and this concern was noted in the IMF press release of December 23, 2009, "Pakistan's vulnerabilities remains high, due to low revenue collection, large energy subsidies and weak private sector credit...resolute implementation of tax administration reforms and timely disbursement of the pledged foreign financing will help facilitate fiscal management...the introduction of VAT and associated administrative reforms, scheduled for July 1, 2010, is key to strengthening revenue, crucial for reducing poverty and financing the needed investment in human and physical capital.
Prompt submission of the VAT law to the parliament and its passage will therefore be important." The hallmark of the government's 2009 economic policy was its adherence, as much as was possible politically, as well as given the global recession, to the IMF programme. The Federal Finance Minister Shaukat Tarin admitted this by stating that he is still engaged in 'fire fighting'. His continued reliance on foreign inflows, based on the 5.2 billion dollar pledges made in Tokyo, has yet to bear fruit.
However his personal achievements have been (i) the signing of the National Finance Commission award in which he agreed to increase the divisible pool by around 10 percent, thereby agreeing to a 10 percent reduction for the federal government, an achievement that some are laying at the doorstep of the Punjab Chief Minister and others at the doorstep of the Prime Minister and the President; and (ii) his insistence on an independent audit of the controversial rental power projects as well as for an independent appraiser for the delay in the paddy procurement by Passco. However, to improve governance a more co-ordinated and sustained effort by the cabinet as well as all the ministries/state-run and owned organisations would be required.
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