HOPE FOR SANITY & SUBSTANCE
May 16 - 22, 2011
Thanks to the old financial guard - the IMF - that a non-event has turned out to be an exercise with some sense and purpose. Historically, our budget making has been tantamount to number crunching - some estimates, some approximations, some revisions and that is that.
Shortfall in revenues and escalation in spending are taken care of by mini budgets, target revisions and cuts in development expenditures. Nobody is responsible to nobody. A malfunctioning budget is something the budget makers and the public should expect with no-eyebrows-raised. The atmosphere, this time, is a bit different. Held-up funds both at IMF and CSF are keeping the budget officials on their toes. Their ongoing meeting with the IMF, in Dubai, is seen as close monitoring by those concerned about the money they have lent or donated to us.
The FBR people have burnt a lot of midnight oil to come up with two revenue collection estimates, plan A and plan B with reformed general sales tax (RGST) being the dividing line between the two. Since RGST has been the real bone of contention, it is hard to assume that the IMF will acquiesce to a revenue plan that is an attempt at dodging the long outstanding issue. But then, since the imposition of RGST will require parliament approval, our smart economic managers might get some breathing space.
FBR (federal board of revenue) plan A (with RGST) envisages a revenue collection of Rs1,952 billion for the next financial year while plan B (sans RGST) raises the collection level to Rs1,968 billion. The sweetener of an additional Rs16 billion is obviously introduced to soften up the stiff IMF stance over RGST. One should hope the IMF takes the bait.
To meet the revised-down revenue target of Rs1,588 billion for the current financial year, the FBR is still short of Rs430 billion that must be recovered in the remaining two months - May and June. Simple average and previous years' collection trends fail to suggest that the shortfall will be made good. The FBR chairman has pinned his hopes on an early settlement of cases in litigation that have kept recovery of Rs150 billion in suspension. Leaving the issue of current shortfall at that, one would like to question the reliability of next year's revenue target that has been given an upward push of 23 percent. The question becomes more pertinent in view of National Accounts Committee's negative report about the economy. The report says: "Pakistan's economy seems not out of hot water as all sectors remained behind targets in 2010-11, with services sector emerging as the main contributor to the paltry overall growth largely because of rising defense spending and 50 percent increase in salaries."
The NAC, the IMF, and ESCAP (the UN Economic Commission for Asia and the Pacific), all have consensus over Pakistan's expected GDP growth during the current financial year - near about 2.8 percent. The potential of agriculture sector, which recorded a meager growth of 1.21 percent remains under-tapped, as usual. The major crops recorded an overall negative growth of 4.03 percent. The industrial sector too, recorded an overall negative growth. The services sector, although recording a growth of 4.1 percent, divulged an alarming trend with finance and insurance sectors going into a negative of 6.26 percent. The construction sector that had shown a tremendous growth of 28.44 percent last year, has slumped back to a nominal growth of just 0.28 percent. The overall GDP growth owes much to minor crops, livestock, fishery, small scale manufacturing, slaughtering and services sector (with the exception of finance and insurance).
The budgetary proposals that will come up for discussion with the IMF at Dubai will generally revolve around the imposition of RGST and exercise of strict fiscal discipline. The deficit percentage that has been scaled up from the initial four percent to 5.5 percent will engage most of the attention. This will turn the scanner to government borrowing. The IMF has already expressed its dismay over the dilution imparted to the SBP Draft Amendment Bill that has recently been cleared by Senate's Standing Committee on Finance. The altered version of the draft aims at giving more leeway to the government in borrowing from SBP and the banking system. The original draft bill had already been cleared by the National Assembly a year earlier. Some government and opposition members thought the bill was a direct outside interference in the financial affairs of the state and, therefore, went for its overhauling. The IMF, on the contrary, is of the view that the original draft guaranteed complete autonomy of the central bank which is a key requirement under all standby arrangement program agreements. The changes in the original draft are a compromise on the central bank's autonomy and, therefore, not acceptable to the IMF. The altered draft places almost no bar on government borrowing except that the same should be reduced to zero at the end of each quarter. This condition alone cannot stop the government from borrowing to any extent, by simply using the rollover process to which the banks are quite used to.
Last year, after the FY-11 budget was announced this scribe observed: "While presenting 3.259 trillion FY-11 budget, the newly inducted finance minister Dr. A. Hafeez Sheikh sounded like one of our 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. A. 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's 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, instead of criticizing him for that, 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."
Luckily, the FM continues to hold his job. We will just reproduce his FY-11 budget objectives and leave it to the FM himself and the analysts to see how much of the job has been accomplished. The objectives were: 1) To protect the economic recovery; 2) To control the inflation; 3) To achieve self-reliance through domestic resource mobilization; 4) To reform and enhance social protection regime through waste elimination and targeted subsidies; 5) To handle prudently the loss making public sector organizations (PSEs).
What one expects is that the FY-12 budget is not yet another statement of objectives. The most important economic event should not turn out to be a number crunching exercise. It should bring with it some sanity and substance, a lot of prudence, and a ray of hope.