REVIEWING OBJECTIVES OF THE FEDERAL BUDGET 2011

SHAMSUL GHANI
(feedback@pgeconomist.com)
June 14 - 20, 20
10

While presenting 3.259 trillion FY11 budget, the newly inducted finance minister Dr Hafeez Sheikh sounded like one of Pakistan's past finance ministers Dr Mahboobul Haq who, not with a feudalist mindset, had a soft corner for the poor masses of this country and who, in stark contrast to the market economy tactics, introduced indexation system to save the masses from the savageries of inflation. But as expected, he was soon relegated to the academic backyards to grow the theoretical crop of his pro-masses economic ideas.

Dr Hafeez Sheikh, possibly belonging to the same group of economists, has preempted by making an honest admission that he is not an influential person (and therefore not in a position to implement his nationalist and pro-masses economic policies). Let us see how long he takes to be re-designated as "ex-finance minister"?

It will be unfair if we try to carry out a statistical postmortem of the budget as the FM did get little time to concentrate on his job and incorporate in the budget his policy preferences. What he could possibly do, and he did, was to spell out some objectives that he intended to achieve as a finance minister. If some of his stated objectives are not achieved during the next financial year, we should show patience and see how he responds to the budgetary variances and what corrective actions he takes. In the 2011-12 budget, given that he continues to hold his job, we will have a good opportunity to measure his real worth.

Before describing the objectives, the FM gave a brief account of how this budget differed from the previous ones. The first differentiating feature was the transparency aspect as pains were taken to involve the stakeholders in the consultation process to get their feedback and suggestions.

Consumer groups were also part of the consultation process but hardly anything seems to have gone to their benefit. One percent increase in the GST and removal of subsidies were the negative achievements for them. The second differentiating feature was the budgetary realism. Unfortunately, all "realistic budgets" tend to demand further tightening of belts from the masses as Dr Mahboobul Haq is once reported to have said, "All sacrifices are paid by the poor". The third differentiating feature-no doubt a very positive departure from the past-was an additional 57.7 per cent transfer of funds to the provinces. This is a historical change ensuing from the new NFC award that has put the ball in the court of provincial governments to manage their social sector issues for the larger benefit of their masses.

Rs1.033 trillion are proposed to be distributed among the provinces. The fourth differentiating feature was the fulfillment of international commitments. The postponement of VAT imposition until October is not fulfillment, but in fact deferment of a commitment. Successful implementation of VAT will only testify resolve to meet international commitments, any negative effects of VAT regime on Pakistan's economy notwithstanding. The fifth differentiating feature has been termed as concern for security. This was essentially an effort to rationalise a 17 per cent hike in the defense budget that has gone up from Rs378 billion to Rs442 billion.

As underscored by the FM, the first objective is to protect the economic recovery. The recovery, as we all know, is fragile and open to slippages. Both the international and domestic economic environments remain unreliable in the face of growing security concerns and stubborn recessionary conditions. Fiscal austerity and waste elimination, he said, were the two main areas that need to be focused to build the momentum of economic recovery. The freezing of non-salary government current expenditure, though a small step in this direction, can signify the intentions of the FM to take corrective measures as he gets space to act. The second objective, he said, is the control over inflation. After touching the highest inflation and lowest growth during the last few years, Pakistan's economy has sent alarming signals to all concerned. It is difficult to state if inflation is the result of loose monetary policies or inefficient fiscal policy design or both. We still have the highest bank rate and yet the highest inflation in the region. While conceding that inflation is primarily a monetary phenomenon, the FM spoke plainly about excessive government borrowings from the banking system. It is both monetary prudence and fiscal discipline that will have to work in tandem to relieve the people from inflationary pressures. The third objective of self-reliance through better domestic resource mobilization, he asserted, can only be achieved if Pakistan first reduces dependence on borrowing that has touched the high mark of 55 per cent of GDP and is about to reach the limit set under Fiscal Responsibility and Debt Limitation Act. High government borrowings not only result in high debt-servicing charge but also in the crowding out of the private sector. Higher fiscal deficits prompt the government to cut back on Public Sector Development Program.

Although Rs663 billion have been allocated in the budget for next year's PSDP, the current fiscal year's experience when PSDP was drastically slashed hardly gives any reason to believe that the allocation will be utilised to the full. The fourth objective of reform and enhancement of social protection regime through waste elimination and targeted subsidies is yet another doubtful starter. Without doubting the intentions of the FM, we foresee little government interest in the achievement of this objective. We have seen a continuous and systematic dismantling of subsidies. Government has been doing this at the behest of international lenders. Given the level of corruption and feudalist aversion to poverty alleviation measures, the targeted-subsidy-system can hardly be expected to work. The ongoing Benazir Income Support Program has not produced the desired results

The fifth objective relates to the handling of loss-making Public Sector Enterprises. The power sector PSEs have alone cost to the exchequer Rs180 billion while a loss contribution of another Rs65 billion has come from other PSEs (Railway, PIA, TCP, NHA, Steel Mills etc.). The sixth and seventh objectives of employment generation and creating of conducive atmosphere for foreign investment basically relate to the overall improvement of economic environment. With the tight monetary regime, the ever growing security fears and the government focus on non-economic issues, any change in the economic situation can hardly be expected to take place soon.

Any way, the budget objectives are noble. Before unfolding the said seven objectives, the FM had stated, "The ultimate objective of the budget is to improve the welfare of the people. The citizens of Pakistan are at the centre of the budget". Although there is hardly anything in the budget to improve the lot of the masses, the statement sounds heartwarming and raises future hopes of any actual betterment of the citizens of Pakistan. But, ruling elites are not trained to see the improvement in the lives of the people. Let's see how long the government and the FM bear with each other.