For the first time during his current premiership, Nawaz Sharif personally visited two Sunday bazaars in the federal capital and interacted with the common man as well as the sellers to ascertain the prevalent prices subsequent to the decline in the price of petroleum products in the country. The Prime Minister's critics have been at pains to level charges against the Sharif administration for violating the established principle that any decline or increase in the international oil price must be entirely passed on to consumers and that the current sanctity of macroeconomic data, including the rate of inflation, is being manipulated by the Ministry of Finance to show better than actual performance; yet it is relevant to acknowledge two overarching constraints that face the government today.
First and foremost, the International Monetary Fund programme has set limits to maintaining a quantified level of international reserves and net domestic assets as well as limits to government borrowing from the State Bank of Pakistan. To meet these agreed objectives, the Dar-led Finance Ministry has resorted to heavier than ever external borrowing, including the issuance of bonds at rates well above those prevailing in the global market - the Eurobonds were issued at 8.5 and 7.5 percent for ten and five-year bonds, respectively, while sukuk were issued at 6.5 percent though the prevailing rate in the global market is around 5 percent. In addition, the government has increased its short-term borrowing from the commercial banks, which raises the cost of domestic debt servicing. This has implied a larger-than-budgeted increase in the interest payments compelling the government to curtail development expenditure. In the context of a shrinking development budget many major projects, including power projects, are being affected and reports indicate that the Neelum-Jhelum project may be further delayed as, according to the Managing Director of the project, only 14 billion rupees were disbursed in June 2014 after the lapse of one year and Wapda Chairman has offered the contractors a share in project revenues ahead of schedule.
Secondly, the budget deficit is being compromised by not only heavier borrowing but also by an overestimation of the growth potential of the economy given the incumbent government's policies are similar to those prevalent during the period of its predecessor and include: (i) delays in tax refunds; (ii) taxing the legal economy while continuing the hands-off policy with respect to very low-taxed sectors like the stock markets, farm income levied by provinces as well as the undocumented retail/and wholesale sectors; (iii) continued energy crisis; and (iv) law and order problems. Thus, even though inflation has come down largely due to decline in the domestic oil prices, and need one add that prices are globally sticky with respect to downward movement - a fact evident in our public transport sector - yet the fact remains that the quality of life continues to deteriorate with energy shortages remaining acute as well as little or no access to justice by the bulk of the population.
Perhaps in deference to this perception, an official statement released on Sunday highlighted the Prime Minister's desire to "scientifically monitor" the government's key ministries. This must be fully supported as in nearly all key ministries governance remains a challenge, and the Prime Minister to-date has focused his ire on the appalling performance not on his cabinet members but at the bureaucrats (who nine times out of ten were appointed by his cabinet members). One hopes that scientific monitoring is defined appropriately and includes not only presentations by the relevant ministers but also findings of independent evaluators that must no longer be dismissed as irrelevant. To conclude, it is critical to prepare a monthly summary of findings of not only relevant ministries but also of all independent economists (as well as alternate data provided by the independent evaluators) to better strengthen the Prime Minister's hands to gauge performance and take remedial measures appropriately and on time.
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