The budgetary challenges

Federal Finance Minister Dr Hafeez Sheikh has been extremely active traipsing from one pre-budget seminar to another promising a realistic budget (premised on economic as opposed to political priorities) but in the same breath stating that there will be no new taxes and it would be pro-poor budget these two to three weeks prior to the announcement of the budget 2012-13 in the National Assembly. The question that is repeatedly being asked is whether he can deliver on the economy?
Dr Sheikh is a technocrat and is the fourth finance minister in just over four years. The first one, Ishaq Dar, an accountant by profession, resigned on the instructions of his party leader in protest against the failure of the government to restore superior judiciary. Be that as it may, Dar's ill-advised remarks in Washington DC while attending the spring meeting of the International Monetary Fund/World Bank caused a considerable damage to the economy.
Naveed Qamar, a long time PPP loyalist, was given the interim charge of the Finance Ministry while his party leadership looked around for a more suitable candidate from outside the party. Shaukat Tarin, a commercial banker, was appointed in the third quarter of 2008 who resigned for personal reasons a year and a half later; however there are many who maintain that he resigned because the political government was simply not heeding his advice on the need to implement austerity measures, that he identified in a report presented to the cabinet before his resignation, or indeed his other recommendations for reform that were perceived to have a high political cost notably power sector and taxation reforms. Thus Dr Sheikh is the fourth Finance Minister in just over four years and holds the title of the longest serving finance minister of the Zardari-led PPP government.
Pearl Buck's famous oft cited proverb "if you want to understand today, you have to search yesterday" and Shelley's "history is a cyclic poem written by Time upon the memories of man" highlight the relevance of history in explaining the present and forecasting the future. So what has been PPP's economic policy making history? Z A Bhutto's economic philosophy of roti kapra aur makaan was accompanied by nationalisation and land reforms. Unfortunately, land reforms were neutralised by the landed gentry through the use of fictitious and nationalisation gave rise to poorly performing public sector entities (PSEs). Benazir Bhutto's period of premiership witnessed PSEs being used as recruitment centres for large scale induction of jiyalas - a decision that led to an erosion of the financial viability of several PSEs. It is, therefore, no surprise that President Zardari has followed suit and, in spite of his rhetoric of public-private partnership, several PSEs have reached a critical point by being used as recruitment centers together with inappropriate senior appointments accounting for heavy annual losses requiring massive annual bail out packages that the treasury can ill afford. It is little wonder that PSEs guaranteed debt has risen from 81 billion rupees in June 2011 to 236 billion rupees in March 2012. However, history also shows that the PPP has relied on selecting a Finance Minister from outside its ranks - from the existing pool of senior bureaucrats, domestic and international, whose training and policy thinking is obviously markedly divergent from that of the PPP leadership. This has implied compelling a Finance Minister to take a position that is contrary to his economic philosophy. Examples in the past two years abound including the decision to raise salaries of civilians and military personnel fuelling wage push inflation, refusing to usher reforms in PSEs and instructing the Finance Ministry to release the bail out packages as well as subsidies that are massively in excess of what is budgeted and not allowing tax exemptions to become effective.
The PPP, in marked contrast to the PML (N), has failed since its creation over 40 years ago to produce a finance minister from within its ranks. The party has neither proactively supported nor encouraged suitable candidates within its ranks to fill the very critical post of Finance Minister - suitability determined by qualifications and experience.
Given this background what can one expect from the budget 2012-13 based on the fact that its architect is Dr Hafeez Sheikh, with experience as an international bureaucrat? Dr Sheikh became a cabinet minister during the Musharraf era. He was first appointed as federal Finance Minister of Sindh (2000-02) and then as Minister for Privatisation (2003-06). As the Finance Minister of Sindh he most significantly cleared 11 billion rupee overdraft with the State Bank of Pakistan, a small amount given the national context, as well as enhanced the province's relationship with his former employers - the multilaterals; as Minister of Privatisation he completed 18 transactions that netted the country around 50 billion rupees. Needless to add the Supreme Court did become engaged in some privatisation deals during his tenure.
As the federal Finance Minister Dr Sheikh has been unable to replicate his achievements during the Musharraf era. His supporters argue that his previous achievements were in areas where the PPP leadership is at worst actively disengaged in notably clearing the overdraft, austerity and privatisation and, at best, indifferent. While foreign borrowings rose significantly during the past four years, yet, during the past two years disbursements from multilateral and bilateral sources fizzled out as the government failed to implement power sector and taxation reforms. Additionally, US assistance, the largest grant provider, has declined due to the ongoing tensions between the two countries.
Could a jiyala Finance Minister have done things differently? The answer is probably but perhaps not by too much given the fact that constraints laid out by the PPP leadership would not have been different and the incumbent would have been unable to upset the applecart. What could a Finance Minister have done differently? First and foremost, the Finance Minister could have supported the release of realistic data in terms of next year's forecasts or indeed in terms of current year's achievements. This would require delinking the Pakistan Bureau of Statistics from the Finance Ministry. That in itself, would be a big step in the right direction as it would allow the economic managers to prepare realistic budgetary revenue and expenditure targets. A government committed to raising salaries for example must be shown by the finance ministry as to exactly how much the rise in salary bill would compromise its ability to raise its subsidy bill. Second, there has been little if any interference by the political leadership in the performance of the Federal Board of Revenue (FBR) and a Finance Minister must focus on improving its performance through legislative and other reforms and disabling its tendency to overstate collections and ensure that a targeted drive towards greater documentation is quietly ongoing. And finally the Planning Commission must be given specific allocation targets that are realistic, and not allow it to make a wish list that has to be slashed by the end of the year. It does no good from a political perspective if year after year the PSDP is mercilessly slashed while the current expenditure rises. To conclude, there are steps that can be taken by a bold finance minister which are not the focus of attention of the political leadership.