FISCAL REVIEW 2011

"Beware the growing risks of growing fiscal deficit." This was perhaps the gist of advice that former Singapore prime minister Lee Kwan Yew gave to US President Barrack Obama when they met soon after Obama became the President of the US to head the world's largest economy. It is not known whether or not Obama acted upon this advice in letter and spirit but we do know that the world's sole superpower has faced one of its worst post-War economic crises on his watch.
It was only a few days ago that Congres- sional leaders reached agreement to raise the debt ceiling just two days before the deadline set by the Treasury Department. Any comparison between the economies of the US and Pakistan will be highly unfair and unjustified on account of a host of reasons, one can draw a highly important lesson in the context of Pakistan, nevertheless. "I want to announce that the leaders of both parties, in both chambers, have reached an agreement that will reduce the deficit and avoid default--a default that would have had a devastating effect on our economy," said Obama soon after a deal reached between the Republicans and the Democrats.
According to Obama, there is a framework in place that would cut spending by a larger amount than we raise the debt limit, and cap future spending to limit the growth of government. This leads us to three key questions: Isn't the growing fiscal indiscipline the number one challenge to Pakistan? Isn't our country nearing the verge of default in terms of debt servicing with payments against the IMF loan which are just about to begin? Has our government done anything, albeit symbolically, to reduce expenditure with a view to containing ever rising fiscal deficit?
That country's economy is in dire straits is an undisputable fact. The situation is in fact more frightening. We are perhaps heading towards an economic meltdown. Some political scientists argue that one of the key factors responsible for a federation's integra- tion is its prowess to overcome myriad economic challenges with a view to effectively countering dissatisfaction caused by uneven or faulty distribution - perceived or real - of resources among federating units. For example, the break-up of Yugoslavia showed that if a political structure is breaking down, it is extremely difficult, if not impossible, to keep a multi-national state together on the basis of economic rationality alone. Once the po- litical structure has been broken, economic, cultural and other ties that provide some coherence among relatively small groups do not have the strength to solidify and homog- enize a multinational state. Arguably, the country's public and external debt have reached an unsustainable level amid flagrant violations of Fiscal Responsibility and Debt Limitation Act 2005. We are fast heading towards a point when the level of our public debt relative to its economic output will be finding itself in a cul de sac. Such situation would be disastrous because capital markets will begin to lose confidence in the ability of our government- whether its democratic, quasi democratic or military dictatorship--to meet its debt service obligations on time.
The growing nervousness of capital markets will mean that access to private credit can very quickly switch from open, to closed, often with very little warning in terms of rising risk premiums on existing debt or new borrowing. How far away are we from this point of no return? A deeper look into country's macroeconomic indicators clearly shows that the nation is experiencing not only rising inflation, but stagflation because the country's economy unfortunately carries all the features of a sustained inflationary period that is accompanied by rising unemployment and sluggish economic growth. Energy crisis has badly hurt manufacturing, thereby resulting in an increase in the number of unemployed people and lower economic growth. It has also given birth to social tensions in society.
Tax-to- GDP ratio continues to remain the lowest in the region on account of a variety of reasons, mainly because of a lack of political will on the part of the government. While public sector entities (these drain out about Rs 300 billion to 400 billion from the national exchequer) continue to remain a huge burden on the economy, there is also no effort to rationalise subsidies with a view to benefiting only those who really deserve such concessions and reducing the fiscal deficit. There is no FDI on the horizon mainly because investor's confidence has been badly jolted by lack of continuity in policies and fiscal discipline, energy shortages and a serious law and order situation.
The above lines may not be construed as a general disposition to look only on the dark side and to expect the worst in all things because historic exports, record receipt of remittances and current account surplus provide us with some glimmers of hope despite profound stresses. Nor these should be taken as a despairing view on the state of economy. War on terror in north-western parts of the country and a full-blown insurgency in the country's largest province in terms of area notwithstanding, the situation is profoundly grim. It, therefore, demands some out of the box solutions. All our dreams can come true, if we have the courage to pursue them.
All our challenges can be overcome if we show dogged persistence and dour determination. It was only in April this year that President Asif Ali Zardari called upon economists to come up with out-of-the-box solutions. This Fiscal Review in your hands, dear readers, is one such effort in this direction. Although, we strongly believe that a fiscal imperative has a clear precedence over any monetary policy, we are vehemently critical of any approach that renders monetary policy hostage to political considerations and exigencies. This newspaper, therefore, seeks to identify out-of-the-box solutions through the articles penned by those who are widely considered as heavyweights in the world of economics and finance. Moreover, interviews of reputed experts who have spent decades in their respective areas of research seek to provide some plausible answers to critical questions about the present state of country's economy. As a policy, this newspaper will continue to encourage such discourses. Enjoy!!!