Economists generally approve of the budget

[sparklingway]

Hafeez Sheikh’s budget​

By Dr. Pervez Tahir

June 08, 2010

Dr Pervez Tahir served as chief economist of Pakistan in the previous government. (pervez.tahir@tribune.com.pk)​

As far as intentions are concerned, the budget presented on June 5 to a parliament trying to establish its supremacy is a trademark Hafeez Sheikh budget. Since it was not exactly prepared by him, having just arrived on the scene, he was dismissive of its sanctity. He seemed to be suggesting that if need be there could be a budget every day.

The finance bureaucracy had hoped, as usual, that they would manage the IMF conditionality on VAT, but a rights-conscious province empowered by the 18th amendment and the 7th NFC threw a spanner in the works. Unruffled, Sheikh started his speech by extolling the virtues of consensus politics and extending it to economic management. But he did not forget his IFI training to remind the parliamentarians that one cannot be at the head of the queue of borrowers and not meet the conditionality at the same time. For a quarter, he would squeeze the GST some more to get additional revenue and in the meantime work on a grand consensus on VAT. “We are a sovereign nation and take our decisions ourselves” echoed the earlier government statement that we will decide when to start an operation in North Waziristan. Lavish praise was reserved for the second major consumer of the current budget, which otherwise stands frozen from July 1, 2010.

As finance minister of Sindh he cleared the overdraft with the State Bank and paid off bills of some 20 billion rupees. For once, the province became an example of financial prudence. Subsidies were cut and revenues raised. As federal finance minister, he promised the same. Pepco cannot get away with a subsidy exceeding the entire expenditure on civil administration. Ditto for PIA, Pakistan Steel, etc.

When Finance Minister Shaukat Aziz messed up poverty figures, Prime Minister Jamali set up a committee under Sheikh to prepare a poverty reduction strategy. When Aziz became prime minister the report was shelved. A point in the report was that the rich should not get subsidies meant for the poor. Hence praise for the Benazir Income Support Programme, which targets the poor. But the allocation for the programme is smaller than the budgeted allocation in the outgoing year. It is higher than the amount utilised in 2009-10. A Hafeez Sheikh budget will typically allocate resources on the basis of revised allocations or actual utilisation rather than the previous year’s budget.

Implementation of schemes and projects in the development budget suffers because of a gap between allocations and release of funds. It results from the Planning Commission’s efforts to increase development budget and the Finance Division’s constraint to release funds in accordance with resource generation. A lot of power play and arbitrariness follows, with releases determining priorities. Sheikh’s announcement that once a budget is allocated releases will be automatic is nothing short of revolutionary. He will of course know that the control of releases is effectively exercised by the chief executive.

As the author of a book on privatisation in Argentina, He is a privatiser first and last. He had his problems with Shaukat Aziz as minister of privatisation and investment. In real terms, the total size of the budget is the same as last year. That is only the first step to reduce the size of the government. Next is the slashing of subsidies, the effort already quite visible in the budget. In time, an activist privatisation programme will follow.

For the moment, most of these are intentions. Sheikh’s predecessors were not short of ideas either. The act begins when an announced fiscal deficit comes up against the no-go areas of taxation and spending. Let us hope that economists from the World Bank have the will and Sheikh from the land of the Sufis has the heart to bring about the intended consensus on economic management

Published in the Express Tribune, June 8th, 2010.

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Assessing the budget for 2010-11​

By Dr. Meekal Aziz

June 08, 2010

The writer has worked in the Planning Commission and the IMF (meekal.ahmed@tribune.com.pk)
​

The new finance minister was eloquent in his budget speech and it was a pleasure to hear an economist talk about economics. Pakistan has achieved a measure of economic stability following the balance of payments crisis of 2008. Macroeconomic adjustment has taken root, inflation has been brought down and the economy’s twin deficits are better contained. The new budget aims to build on these accomplishments with the hope that economic growth can add jobs and cut poverty.

Fiscal policy as embodied in the budget is appropriately tight. At four per cent of GDP, the fiscal deficit target for 2010-11 would appear to be consistent with the need to take macroeconomic stabilisation forward, reduce inflation further and ensure that the external current account deficit and debt are kept in check. However, rather than looking at the absolute numbers it is instructive to look at it as a percentage of projected GDP; and that comes to a modest 9.8 per cent. Prominent among the tax measures is the proposal to increase the GST by one per cent. Raising tax rates in Pakistan begins to yield diminishing returns but this can be seen as an interim measure until the VAT is phased in at a single, lower rate. The long-awaited tax on the stock market is a welcome, base-broadening measure as are cuts in import duties on a range of commodities.

The failure to implement the VAT by July 1 means that Pakistan will breach a “performance criteria” under the IMF’s Standby Arrangements and will need a waiver of non-compliance from the Fund’s executive board. In the absence of support from all the provinces and the lingering impression that the VAT regime has not been explained to the public fully, the deferment is probably wise. The spending side of the budget, however, disappoints. Experience elsewhere shows that fiscal consolidation efforts that are spearheaded by restraints on spending and lasting spending cuts are more likely to be successful. There is a hint that non-interest, non-defence, non-salary current spending is to be held constant in nominal terms which will imply a fall as a per cent of GDP. Assessing the merits of the significant rise in pay for government servants to compensate for past inflation is always difficult. It seems prima facie to be the right and fair thing to do. But playing “wage catch-up” not only validates past inflation, it also risks stalling the all-important aim of bringing inflation down to the mid-single-digit level. In any event, the target inflation for 2010-11 of 9.5 per cent is disappointingly unambitious even allowing for the cost-push effects of the increase in wages and the removal of ill-targeted subsidies in the budget. Inflation needs to be brought down quickly and this would be the best pro-poor measure that the government could bequeath to the people.

The parlous state of the public enterprises and the quasi-fiscal deficits they create is deeply worrying. The government needs to come up with a programme of restructuring and improving efficiency even if this means large job losses in the case of public-sector companies which are a deadweight burden on the economy. Restructuring, and in some cases, privatisation, will need to be accompanied by fair and equitable severance packages.

Shifting much of the development expenditure responsibilities to the provinces is an important step towards financial devolution. One is concerned however whether the provinces have the requisite technical and administrative absorptive capacity to spend wisely and well. In short, this is a good budget. We now need to move to the more difficult task of implementing it.

Published in the Express Tribune, 8th, 2010.

 

[sparklingway]

The only way forward ​

Dr Ashfaque H Khan

Dr Abdul Hafeez Shaikh, the newly-appointed finance minister, presented his first and the government's third federal budget in the National Assembly on June 5, 2010. Budget 2010-11 is the first budget under the new National Finance Commission Award and as such it posed difficulties far many analysts, experts, trade bodies and other segments of our society in understanding the budget. The varieties of comments made in the print and the electronic media on the budget reflect such misunderstandings. One such misunderstanding deals with the size of the allocations made to the health and educational sectors.

Dr Shaikh's budget speech was unconventional in several respects. Firstly, more than half of the speech was extempore, reflecting his confidence in the budget. No finance minister has ever moved an inch away from the written text of the budget speech. Secondly, Dr Shaikh gave an Economics 101 lecture to his fellow parliamentarians, particularly explaining inflation, the burden of public debt and the crowding out phenomenon. Thirdly, he was upright in acknowledging the many failures of his government in the last two years and expressed his resolve to address the challenges. Fourthly, he was extremely critical about the performance of the Public Sector Enterprises (PSEs) and the damage they have caused to the economy. In so doing, he indirectly criticised his own government in treating these enterprises as sources of unproductive employment. Fifthly, he bitterly criticised his predecessor for "indiscriminate borrowing" and doubling public debt in a short period of time. This requires courage to call spade a spade. I am glad that I was not the only person to have expressed concerns on such indiscriminate borrowings and the rising debt burden.

Budget 2010-11 has been presented with a view to setting new directions for a responsible economic and fiscal management. This budget is a major departure from the last two budgets as it aims to make concerted efforts to address the prevailing economic challenges. Pakistan's current economic challenges include: declining investments and slower economic growth; rising unemployment and poverty; persisting double-digit inflation; unsustaining debt burden; depreciating exchange rate; power mismanagement; and waning confidence of the private sector.

The first and foremost principle in addressing the challenges listed above is to stabilise the economy. Macroeconomic stability is the pre-condition to generate growth momentum. Stabilisation is therefore the main objective of the Budget 2010-11. Through this budget, the government intends to reduce inflation which is the best relief that it can provide to the poor people of this country. Targeting budget deficit at 4.0 per cent of GDP represents the government's resolve in reducing "twin" deficits (budget and current account) and bring debt situation under control. Reduction in deficits and burden of debt would release pressure on interest rates which will allow the SBP to reduce the discount rate, generate growth momentum and create productive employment opportunities.

While stabilising the economy through the budget the government has not forgotten the poor and the fixed income group. The allocation to the Benazir Income Support Programme has been increased from Rs46 billion to Rs50 billion, hence benefiting four million families. This is a targeted cash transfer programme for the poor alone to minimise their difficulties caused by higher inflation in general and food prices in particular. The budget also talks about the exit strategy of the beneficiaries of the BISP in line with the international best practices. The salary of the government servants has been increased (50 per cent) beyond their expectations. The pensioner has also not been forgotten as he would see it rising by 15-20 per cent. These were the human face of the budget.

The budget also acknowledges the dominant role of the private sector in promoting growth and creating employment opportunities. The role of the government should only be restricted to creating conducive environment for the private sector through right policies and investment in physical and human infrastructure. Currently the government is actively involved in several public sector enterprises such as PEPCO, PIA, Railways, Pakistan Steel, PASSCO, TCP, NHA, Utility Stores etc. These PSEs are inefficient and poorly managed and are a burden to the national exchequer. Can a poor country like Pakistan afford to pay Rs245 billion from the budget to keep them afloat? The answer is obviously no.

Dr Shaikh has committed himself to restructure these eight PSEs in 2010-11 and make them financially solvent as part of the reform agenda. History around the world has shown that such PSEs cannot be made financially solvent through restructuring. The only solution is to bring them on privatisation mode and sell them to the private sector even if we get a single rupee. At least it will save Rs245 billion of the national exchequer which can be diverted to the development programmes. It is sad that Dr Shaikh did not talk about privatisation of these PSEs and did not put any amount under privatisation proceeds in the budget. Do we sill need ministry of privatisation?

Dr Shaikh and his team should be congratulated for presenting a sound budget in a most difficult and challenging time. This budget is fully consistent with my thoughts which have appeared in this column. This was the only way forward to address the current economic challenges. This budget is not a populist budget but a realistic one. Budget 2010-11 can be termed as stabilisation budget with human face and reform agenda. Mr Prime Minister! Your economic team has presented a sound budget. It would need your support in executing and achieving the revenue, expenditure and budget deficit targets. These targets, though ambitious, are yet achievable, provided the provincial governments and yourself keep supporting Dr Shaikh and his team.



The writer is director general and dean at NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk

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Fiscal fire-fighting
Dr Abid Qaiyum Suleri

Budget 2010-11 did not bring any major surprises. As expected, the budget was in line with Pakistan's commitment with the IMF. Many had already read its outlines in the Fourth Supplementary Memorandum on Economic and Financial Policies (SMEFP) that the government submitted to the IMF on May 3.

In line with the SMEFP, the government contained its fiscal deficit to four per cent. Although the term "value-added-tax" was not used, it was announced that the GST would be reformed, with the deadline of Oct 1 set for this purpose. The GST has been increased by 1 per cent and all electricity tariff differential subsidies are eliminated. Power tariffs are being raised retroactively and the unrecovered power-purchase cost for the current fiscal year will also be recovered from the consumers.

There will be no flexibility in monetary policy and the liquidity available to the private sector will remain scarce. Subsidies are being phased out and successful implementation of the public-sector development programme will depend on a successful realisation of external assistance, including the Tokyo Pledges, the Kerry Lugar money and the IMF's next tranche.

There was a time when we looked forward to the annual budget, because decisions taken in it--for instance, on changes in fuel prices or power tariff--used to have long-lasting impact, at least for the whole remaining year. Things changed and most ticklish issues were kept out of the annual budget, which were then dealt with through mini-budgets.

In order to make budgets more "people-friendly," imported wisdom dictated that the prices of oil, gas, or electricity are kept away from the National Finance Bill. Ingenuous tools like regulatory authorities were invented (with very little political independence), such as the Oil and Gas Regulatory Authority and the National Electric Power Regulatory Authority--so that oil prices or the power tariff can be changed as often as that is required to meet our international commitments without the need for their inclusion in annual budget documents.

This budget is not only painful for the people. It is painful for the government as well, and rather more so. No democratically elected government likes to alienate its voters. The PPP-led coalition will have to face the next general elections and it is mindful of the fact that its economic compulsions are making it extremely unpopular among the masses. However, due to lack of any medium- to long-term economic vision, the present government is compelled to swallow the bitter pill that is called "macroeconomic stability" at the cost of microeconomic development.

The government is facing a crisis of "six Fs" (fuel, food, fiscal problems, functioning democracy, the frontiers, and the growing fragility of the climate), but prioritises its spending on "four Ds" (defence, debt repayment, day-to-day administration, and what goes for development.

Given the current security situation, the government can legitimise its 17 per cent increase in defence expenditures. There is no escape from debt repayment. If we borrow money, we have to return it. The finance minister (the fourth in the last two years) has already indicated that we will have to borrow more from the IMF to pay back the existing loans. The token reduction of 10 per cent in cabinet paycheques will not reduce the expenses of day-to-day administration. It seems that, like always, development expenditures would be axed in case the external assistance and loans do not come through.

Last year we relied on the Friends of Pakistan's "commitments" to meet our budgetary deficit. Later on, it proved that the Friends of Pakistan were only a political forum, and not a lending group, so we had to slash our PSDP. This time the government is relying on timely disbursement of donor support pledged during the donors' conference in Tokyo in April 2009.

So what is in the federal budget for us? Most commentators think it is an excellent piece of number crunch, devoid of any real meaning. Without a solid and credible baseline and a clear vision, things can never improve. The recently released report of the SDPI, the WFP and the SDC on the state of food security in Pakistan reveals that poverty and hunger are increasing: 48.6 per cent of the population in Pakistan is food-insecure, as are 61 per cent of its districts, and consumption of wheat declined by 10 per cent during last year due to people's lack of purchasing power.

One of the most salient features of that report is exploring food insecurity-militancy nexus. It is predicted that after Khyber Pakhtunkhwa, Balochistan will be the next hotspot of conflict and militancy–not because of Islamic militants but due to poverty and marginalisation. Whether the federal and provincial governments can address the issue of social injustice, particularly in Balochistan and Khyber Pakhtoonkhwa, remains uncertain.

A budget is a planning tool and if the planning does not address the burning issues related to the common masses, then the budget of little use. Fire-fighting has been the most popular managerial style of all Pakistani governments. Can the present government bank on fire-fighting for its remaining tenure?

The writer is a policy analyst and executive director of the Sustainable Development Policy Institute. Email: suleri@sdpi.org