A 'few failures'

Dr Hafeez Sheikh, the Federal Finance Minister, while speaking at a pre-budget meeting of the National Assembly Standing Committee on Finance conceded 'a few failures' of the government's economic policies notably poor performance of the power sector, inability to control subsidies (with 86 percent of subsidies according to budgetary data diverted to the power sector) and inability to attract foreign investment which clearly can be attributed to severe energy shortages and continuing law and order problems.
The Finance Minister also accepted poor performance of the balance of payment position because of rising oil prices and global recession which, he pointed out, had been supported by higher remittance income. Neither of these identified failures are the direct responsibility of the Ministry that Sheikh heads.
In recent weeks, reports that the Minister of Finance is at odds with the Minister of Petroleum and Natural Resources as well as the Minister for Water and Power have surfaced with alarming frequency. The collective responsibility of a cabinet, in terms of the performance of key macroeconomic indicators that are a function of the performance of individual ministries/departments, has been overshadowed by accusing the Ministry of Finance of not releasing funds as and when approved by the cabinet. Thus the Water and Power Minister has been as vociferous in accusations against Sheikh as has been the Railways Minister for not releasing the amount that was approved by the cabinet and/or during a meeting held at the Presidency. The Finance Minister, in turn, has accused the others of failing to improve their own performance through implementing identified reforms, controlling corruption and/or taking economically viable pricing and supply decisions. He also has, time and again, told his cabinet colleagues that the Ministry of Finance cannot simply endorse printing money irresponsibly as it is highly inflationary (although, perforce of circumstance and much to his chagrin, this policy is in practice). Sheikh also legitimately maintains that the overarching objective of his ministry is to ensure that the budget deficit remains sustainable and this objective is constantly being compromised due to failure of several ministries to improve performance through reforms and instead to rely on handouts by influencing the Prime Minister or the President to release bailout packages.
While not disagreeing with the Finance Minister on these essentials, the fact remains that the Finance Minister, especially one who is essentially a technocrat, cannot plead his own inability to influence his cabinet colleagues to do the right thing as the sole reason for his sustained failure, second year running. His ministry has yet to present a realistic budget or indeed implement measures designed to improve performance of even those departments/bodies that come under it. Reference to the poor performance of the Federal Board of Revenue is in order, a body that is considered to surpass all other departments/ministries in terms of corruption (greater over a longer period than the loss to the exchequer with respect to the rental power projects) and routinely presenting misleading figures just before the budget is announced - an activity that is currently being challenged by the Federal Tax Ombudsman.
Dr Sheikh was correct when he blamed global recession as well as rising oil prices as factors impacting negatively on our balance of payment (BoP) position. However, he must also acknowledge that remittance income may have risen not only because of some steps taken by the State Bank of Pakistan, but also because of high inflation, particularly for food and energy needs, a larger amount is required to make both ends meet by their families. In some instances, the rate of return in the global market being close to zero, while in our country a record high interest rate with the objective of mopping up excess liquidity (a part of 7.3 billion dollar condition for the Stand-By Arrangement signed with the International Monetary Fund) may be an attraction for simpletons amongst our overseas workers to send money back home. This is so, because what they would earn in higher rate of return by way of interest, depending on the timeframe, they might lose more due to the slide of the rupee versus the foreign currencies. Unfortunately, however, this money is not being diverted towards investment purposes, which would propel growth but towards government borrowing to meet the rise in its budgeted current expenditure.
Finally, Dr Sheikh informed the Standing Committee on Finance's meeting that in the next budget, reliance would be mainly on income and sales tax in line with best international practices. Two elements need to be highlighted. First, the best international practice of relying on income tax, a direct tax with greater incidence on the rich than the poor, needs to be modified before it can be termed a fair and equitable tax in Pakistan. This is so considering that one of the largest and wealthiest groups in the country is exempt from paying tax on net income, namely the rich landlords who are always heavily represented in our assemblies. Income tax is mainly collected from people belonging to the salaried class, who do not constitute the richest group of people in this country. Secondly, sales tax is a successful tax in countries which are developed, with the bulk of the population belonging to the middle-income group. This is not the case in Pakistan, especially not in the last few years where high inflation due to higher utility charges, lower output due to energy shortages and law and order problems and a rising budget deficit have pulled more citizens down to poverty.
To conclude, it is hoped that our ministers take responsibility individually and collectively for the poor state of affairs in Pakistan today and begin to formulate policies in a cohesive manner for that is the need of the hour.