Finance ministers from the 20 most developed nations of the world met in Cairns, Australia, to thrash out policies that would achieve a total growth rate of 2 percent over the next five years. However, the next day the G-20 scaled down their target to 1.8 percent - a scaled down target that nonetheless envisages injection of trillions of dollars into their economies but not as bailout packages. In other words, the ongoing controversy over growth versus austerity in the West in the wake of an ongoing recession appears to be over and the G-20 countries have now firmly focused on growth as the priority.
However, this new focus does not imply that the G-20 are in any way critical of the earlier growth versus austerity objective and according to Secretary General Angel Gurria "why do you think some countries are doing better now? It's because they did the structural changes they went in earlier and now it is starting to produce a benefit."
For developing countries 2 percent is largely viewed as too low a target to achieve developmental take-off stage simply because investment in infrastructural facilities, of which there is a dearth in the developing world including Pakistan, has a much higher rate of return than in the private non-utility sectors, which are dependent on disposable income for sales. Be that as it may, the G-20 in a communiqué after the end of the two-day meeting mentioned 1000 measures that had been agreed so far, which include to accelerate infrastructure development, financial reforms and encouraging free trade.
Christine Lagarde, the chief of the International Monetary Fund (IMF) supported the efforts of the G-20 so far in developing growth strategies to lift medium-term growth while US Treasury Secretary Jack Lew stated that the world economy was facing head winds - and one would assume that he was referring to slow down in growth in Europe, Japan and China partly and the contribution of global political events including the ongoing conflicts in Ukraine and Syria/Iraq due to the emergence of ISIS; Lew emphasised that the G-20 "stressed the importance of immediate support for creating jobs, growing the economy, and implementing fiscal strategies flexibly to support demand." This was reiterated by the Australian Treasurer Joe Hockey who stated that "we are determined to lift growth, and countries are willing to use all our macroeconomic levers - monetary, fiscal and structural policies - to meet this challenge." In effect the two advised member governments to create jobs through injecting finances into the economy, which could be through appropriate monetary and expansionary fiscal policies designed to fuel the wheels of private sector industry thereby creating more jobs that, in turn, would increase sales thereby providing the necessary lubrication to the growth process.
Pakistan as a case in point, performed poorly last fiscal year with a growth rate of 4.2 percent released by the Ministry of Finance that is being challenged by independent economists as well as the International Monetary Fund (IMF) who claim a growth rate of between 3.6 and 3.4 percent at best. The question is are we moving towards a growth model at all or are we focused on reducing the budget deficit as per our commitment to the IMF through implementing specified time bound structural changes including raising electricity tariffs that are compromising our very growth? The two budgets presented by the PML-N unfortunately were long on claims of a macroeconomic turnaround that is simply not backed by appropriate policies.
First, the claim that indebtedness has declined because the government has increased reliance on long-term cheaper foreign debt acquired at 4 to 5 percent rate of return comparative to the domestic debt procured at 12 percent is challenged by the following data: (i) servicing of domestic debt rose from 952 billion rupees during the last year of the PPP-led coalition government to 1064 billion rupees in the 2013-14 budget to 1108 billion rupees in the revised estimates to 1224 billion rupees in the current year's budget; (ii) the total external indebtedness for the year is contingent on the government keeping the rupee value artificially low - a charge that the IMF team made in the third quarterly review arguing that the focus should be on real as opposed to the nominal rate. However, the foreign exchange risk, which even if one takes the conservative 5 percent erosion a year would make the foreign debt more expensive than domestic debt in years to come.
And secondly, the floods and the relief and reconstruction assistance promised by the Prime Minister and Punjab Chief Minister would simply negate the budgeted allocation for infrastructure development. Additionally there is concern that the government in its second budget as well continued to prioritize roads and development rather than energy and Metrobus as opposed to again energy to ensure that lack of electricity does not continue to play a negative role in growth.
To mitigate the impact of these two negatives it is vital for the government not only to be more credible in its data, which can be achieved through delinking the Pakistan Bureau of Statistics from the Ministry of Finance but also reprioritize its development expenditure.
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