DEFICIT CONTROL IS THE KEY TO SUCCESS
June 14 - 20, 2010
There has been a continuous debate over how the fiscal deficits influence an economy. A number of world economies has benefited from the prudent fiscal deficit management. US for an extended period deliberately created huge fiscal deficits to perk up its economy. This in turn resulted in surpluses for its leading trade partners in the Asian region, particularly China, Japan, and Middle East.
US's unique position made it a strong candidate for benefiting from such measures, as it feared no IMF or World Bank rebuff for its increased debt appetite. Its strong currency that formed basis of most of the international trade transactions also encouraged it to go for the high fiscal deficit gambit. This sort of high-risk economic maneuver is not the cup of tea of other economies, no matter how strong they might be. Greece is an example. Until recently, it used to be an economy that boasted high ranks among the comity of developed economies. Greece can be a case in point for world economists especially those who are staunch supporters of Friedman's market capitalism. Over expansion of economy and the resultant creation of excessive wealth give way to unnecessary consumption on the consumer side and corruption on the government side. Huge salaries laced with irrational bonuses were the hallmark of Greek society a year back. During 2009, its imports ($61.5 billion) far exceeded its exports ($18.6 billion).
The Greek economy, double the size of Pakistan's economy, boasted a nominal per capita GDP of $32,100 until 2008. The estimated CPI inflation during 2009 was just one per cent. People living below poverty line accounted for only two per cent. Despite having agriculture potential, its growth was services-sector-dominated. According to 2009 estimates, 75.8 per cent was contributed by the services sector, 20.8 per cent by the manufacturing sector, and just 3.4 percent by the agriculture sector. It was for the first time after 1993 that the economy reported a negative growth of two per cent.
The reasons for Greek economic turmoil and the resultant debt crisis widely vary, from a high degree political and economic corruption to a more than 100 per cent debt to GDP ratio; from lack of global competitiveness to the persistent under reporting of deficits and; from massive tax evasion to lavish living style.
For 2009, Greece declared a fiscal deficit of 6.8 per cent, which after several audit reviews was scaled up to 13.7 per cent. The incurrent high fiscal deficits and the consequent ballooning up of the debts resulted in the collapse of the economy. Unlike Pakistan which had to run from pillar to post to eke out a $7.6 billion IMF bailout assistance in November 2008, the EU countries huddled together in emergency to iron out a rescue package for Greece - Germany offering the proverbial resistance to make it look a hard-earned package - and IMF committed a $61 billion assistance. Although euro took the worst battering, yet a unified European currency turned out to be a boon for Greece as all euro zone countries felt obliged to pull the Greek out of the fire. Will Muslim countries or at least the Arab countries mull over the prospects of a unified currency?
Fiscal deficits are administered doses of medicines, which if taken in measured quantities can improve the health of an economy. The current year's deficit of 5.5 per cent is definitely on the higher side and betrays uncontrolled, debt-based, unproductive spending by the government in Pakistan. Since domestic debt carries a higher interest charge as compared to the external debt, the higher debt servicing drags the economy further down. The estimated fiscal deficit of 4 per cent for the next year is still on the higher side, yet it shows government resolve to check this unhealthy economic development. Controlled and low profile fiscal deficits are considered good for the developing economies as they stimulate government spending through increased debt. But, the government spending should be on the development side and additional debt assumption should be least inflationary in nature. The FY10 deficit of 5.5 per cent, besides being on a much higher side, failed to provide any stimulus to the economy simply because neither the spending was for development purposes - the PSDP being slashed to a bare minimum - nor inflationary considerations were allowed to limit the size of government borrowing. A negative byproduct of high government borrowings was the crowding out of the private sector. This further delayed the economic recovery.
The finance minister Dr Abdul Hafeez Sheikh while making the budget speech mentioned in very lucid terms: "The budget is but one important instrument of economic management. However, the importance of this once a year ritual should not be overly exaggerated. There are important linkages between the budget and other instruments of government policies including monetary, trade, pricing of agriculture, electricity, gas and petroleum products, as well as various economic packages. Ultimately results depend on the impact of a combination of these policies."
One factor can be singled out to have a greater influence on the size of Pakistan's budget deficit and that is the loss-making propensity of public sector enterprises (PSEs), which have made a negative budgetary contribution of Rs245 billion to send the overall deficit substantially up. What would have happened if a positive contribution were made by the PSEs is anybody's guess.
Although no programs to tackle the issue of PSEs have been spelled out, the effective overhauling of the giant, sick organisations seems almost out of question, given the economic culture we are living in. The issue of PSEs remains an elusive subject as economic analysts are divided on this issue, some contending that these should be managed by the state for social and national reasons. One from this set of analysts when questioned on the inefficiency and overstaffing of state-controlled loss-making organisations conceded: "There is no problem with that. This is where your economic and social values come in. Is the purpose of the state merely to fill the pockets of the profit makers? Or is the state supposed to work for the welfare of the maximum number of people?" Others think that the PSEs are a big drain on public exchequer and that they should be privatised. The Musharraf era blocking of Pakistan Steel Mills privatisation through legal intervention is still fresh in the minds of the people. One tends to wonder if we would have been better off if PSM were sold, then what price it was going to fetch.