PML-N's economic mismanagement

Three deficits have become an increasing source of concern for Pakistan: budget deficit, current account deficit and poor governance requiring state funded injections to meet the deficit of state-owned entities (SOEs). And the Abbasi-led administration is dealing with all three with one extremely high priced prescription: borrowing - domestic and foreign.
All three deficits are the outcome of PML-N policies. The Ministry of Finance claims that any administration's capacity to alter the major components of current expenditure is severely limited - to around 88 percent of the budget as the following components cannot be adjusted: (i) mark-up on domestic and foreign debt estimated at 36 percent of total current expenditure; (ii) defense and services at 24.4 percent; (iii) pension, civilian and military, 6.5 percent; (iv) running of civil government 10 percent; and (v) grants and transfers 11 percent.
This argument has merit; however what is disturbing is the unprecedented increase in all five components of current expenditure since the PML-N administration took over power in the first week of June 2013. First, in the last year of the PPP-led coalition government's tenure (2012-13) the mark-up on domestic and foreign loans was projected at 925.7 billion rupees (actual revised estimates for 2011-12 was 843.8 billion rupees) while in the current fiscal year 2017-18 the amount under this head is 1.363 trillion rupees - a rise of 47 percent in just five years. To raise borrowing by such a massive amount required a decision by the Sharif administration. The total allocation under this item is budgeted at 36 percent of total current expenditure in 2017-18. No doubt defaulting on loans would have severely negative repercussions on the country's credit rating as well as on the ability to borrow, the argument used to claim that this item cannot be reduced, however the decision to borrow is taken by the government.
Second, budgeted allocation on defense rose from 545 billion rupees in 2012-13 to 920 billion rupees in 2017-18 - a rise of 59 percent. The operation Zarb-i-Azb and Rudd-ul-Fasaad have significantly reduced the number of terror-related attacks in recent years and the associated loss of human life and assets which is why this expenditure rise is generally supported. This expenditure is not all borne by the taxpayers as it was partly funded through the Coalition Support Fund (CSF) though the Trump administration has made only one payment under this head with little prospect of any further releases, though inexplicably Dar budgeted disbursement of 141.7 billion rupees under this head in the current year. Since 2002 the US has given Pakistan 14.573 billion dollars under CSF, 7.96 billion dollars in security assistance (annual average of 530.4 million dollars) - 3.8 billion dollars under the Foreign Military Financing programme, 2.35 billion dollars under the Pakistan Counterinsurgency Fund and Counterinsurgency Capability Fund, and 911 dollars under the International Narcotics Control and Law Enforcement programme.
Third, running of civil government accounted for 239.8 billion rupees in 2012-13 and rose to 376.8 billion rupees in the current year's budget - a rise of 63 percent due no doubt to the raise in civil service salaries double the claimed inflation every year. Be that as it may, during the first year Dar did try to keep salaries of bureaucrats constant however the opposition, including the PPP and the PTI, made a hue and cry prompting the PML-N government to capitulate.
Fourth, pension, civil and military doubled in five years - from 129 billion rupees budgeted in 2012-13 to 248 billion rupees. The reason: an announced increase in pensions by the Sharif administration.
Fifth, grants and transfers (grants to provinces and to others) rose from the budgeted 2012-13 total of 312 billion rupees to 430 billion rupees - a component of the National Finance Commission award which the federal government cannot revisit.
That effectively leaves subsidies as the only major form of expenditure that the Sharif administration chose to manipulate, no doubt partly due to International Monetary Fund pressure after the country went on a Fund programme in 2013 and partly due to the decreased need as the international prices of oil plummeted during the early years of the incumbent government. During the PPP-led coalition government subsidies were budgeted as low as 166 billion rupees in 2011-12; however, the actual disbursed was a whopping 512 billion rupees. In 2012-13, the budgeted subsidies were 208.5 billion rupees though few thought this amount would not be more than doubled by the end of the year. Dar made a major contribution to the rise in subsidies in 2012-13 by eliminating the energy sector's circular debt of around 480 billion rupees on the second last day of that fiscal year.
In 2017-18, Dar budgeted only 138 billion rupees as subsidies - a target he may have achieved given that last year's revised estimates for subsidies were 168.9 billion rupees. Oil prices are on the rise at present but they have yet to reach a high of 70 dollars per barrel while they peaked at 140 dollars per barrel in 2008 and 2009.
Development expenditure rose from 477.8 billion rupees in 2011-12 to 936.4 billion rupees last year - a rise of 95 percent. However, before becoming enamoured of the PML-N's greater commitment to development it is critical to note that the highest allocation is for roads, a priority that given the extent of poor availability of social services including clean drinking water, may be misplaced.
Tax revenue has increased dramatically - from the budgeted 2.5 trillion rupees in 2012-13 to 4 trillion rupees in the current year, a rise of 62 percent. Unfortunately, most of this is sourced to the rise in withholding taxes in the sales tax mode which has effectively implied the filers who have paid income tax are taxed on purchase of services as well. The non-filers pay a flat rate for the same services, almost double the rate of the filers, but do not file their returns and therefore the financial benefit of not filing remains. Non-tax revenue rose from 730 billion rupees in 2012-13 budget to 979.8 billion rupees in the current year's budget - a total rise of 249.8 billion rupees however an additional 60 billion rupees was sourced to State Bank of Pakistan profit which requires an explanation and 148 billion rupees to a laughable generic item 'others'.
The argument that the government has little manoeuvrability to change either expenditures or revenue sources is, therefore, facile.
Widening current account deficit is attributable to three flawed government policies: (i) the rupee remains over valued notwithstanding the December 2017 depreciation which negatively impacts on our exports competitiveness; and makes imports more attractive; (ii) refunds due to exporters are delayed to shore up revenue and understate the budget deficit but which compels exporters to borrow to meet their liquidity needs raising their input costs; and (iii) utilities are provided at a higher cost than in neighbouring countries which again make our input costs higher.
Daniyal Aziz, the Minister for Privatisation, recently stated that the state-owned entities are suffering a deficit of over 600 billion rupees. This gap too remains unplugged and PML-N manifesto promise to privatize and/or restructure loss-making units have fallen by the wayside of politics and nepotism in appointments.