sparklingway
SENIOR MEMBER
- Joined
- May 12, 2009
- Messages
- 3,878
- Reaction score
- 0
Hafeez Sheikhs budget
By Dr. Pervez TahirJune 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 years 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 Commissions efforts to increase development budget and the Finance Divisions constraint to release funds in accordance with resource generation. A lot of power play and arbitrariness follows, with releases determining priorities. Sheikhs 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. Sheikhs 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.
---------- Post added at 10:01 AM ---------- Previous post was at 10:00 AM ----------
Assessing the budget for 2010-11
By Dr. Meekal AzizJune 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 economys 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 IMFs Standby Arrangements and will need a waiver of non-compliance from the Funds 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.