EDITORIAL (November 12 2008): A report titled "Economic Stabilisation with a Human Face", prepared by a panel of economists, with Dr Hafiz Pasha, former Deputy Chairman of the Planning Commission, in the lead, argues in favour of an independently developed package of reforms. This, the report contends correctly, is critical to ensure avoiding the stop-go cycle of growth inextricably linked to the level of foreign assistance.
The report is particularly damning in terms of the possibility of the present government achieving any of its budgetary targets. The budget deficit of 4.7 percent, as agreed with the International Monetary Fund (IMF) team in May this year after much debate over the Fund's initial insistence that the deficit be brought down to 4.2 to 4.3 percent, is not likely to be achieved. The panellists' projection works out to 6.4 percent with a deficit of 853 billion rupees instead of the targeted 584 billion rupees. Inflation is unlikely to be contained at 12 percent and a GDP growth rate of 5.5 percent is also unrealistic, so states the report.
Given the weekly inflationary figures of over 25 percent and an industrial and farm sector reeling from an energy crunch, the projections of the panelists make intrinsic sense. Their report also notes and correctly so, that current expenditure is understated because of the fast eroding rupee value, which accounts for a more rapidly growing foreign debt than was envisaged during the budget preparation as well as a higher domestic debt due to higher interest rates offered to facilitate greater non-bank borrowing (a large proportion of which is short term).
The estimated rise in debt servicing alone: 72 billion rupees. And if one adds the 20 percent rise in the salary for military personnel as well as civil servants, as announced in the budget amidst much applause, current expenditure is likely to be higher by 169 billion rupees than what was budgeted.
Some would, no doubt, argue that the panelists' suggestion to formulate a package of reforms independent of dictation by international financial institutions may not be compatible with the projected inability of the government to achieve any of its budgetary targets. And with the Pakistani leadership having formally revealed its intent to go on the IMF programme there is a definite likelihood that stringent conditions would be more reflective of a donor developed package instead of an independent indigenously developed package of reforms. Dr Pasha, in his former capacity as the United Nations Assistant Secretary General, must be aware of the constraints under which countries with poorly performing macroeconomic fundamentals like Pakistan today operate, especially when they require urgent injections of between 5 to 10 billion dollars.
Be that as it may, few in Pakistan would disagree with what Dr Pasha and his team, have proposed: a home-grown package designed to achieve stabilisation and remove structural imbalances. While his critics may well argue that the home-grown recipe, devised by those who have done a stint in the international financial institutions, may not be all that home-grown, yet the fact remains that Pakistani governments, have too often abandoned reforms half way, thereby going headlong into a tailspin that brought us to our knees again, begging for assistance.
The principles underlying the home-grown strategy have been identified in the report, namely, preserving the growth momentum though the IMF is likely to insist on a brutal contractionary monetary policy with negative implications on growth, a pro-poor growth unlikely given the massive reduction in subsidies in recent months that are raising poverty levels nation-wide, and a strong social protection strategy for which the government of Pakistan has no funds.
Dr Pasha's team has suggested 2.6 acres of government land to be transferred to 520,000 landless farmers - an approach reminiscent of the five marla scheme endorsed by some political parties in the past. It is also suggested that all inputs be provided as well, however, Dr Pasha may do well to recall that small farms do bring the national yield average down. He would no doubt argue that this would be a pro-poor policy. However, one would hope that this policy would not be abused as in the past, whereby land so transferred was hijacked by the rich landlords.
The panellists have also suggested, in line with the statements by the Advisor to the Prime Minister on Finance, Shaukat Tarin, that the exchange rate must be allowed to depreciate to a level at which the trade imbalance would be eliminated. A trade imbalance is unlikely to be eliminated through depreciation alone for Pakistan, principally because the value of our imports is almost double that of our exports.
Most of the remaining prescriptions identified by the panellists have formed part of government policy over the past decades though their implementation remained unsatisfactory: (i) A more comprehensive framework for the prioritisation of projects in the PSDP which requires a restructuring of the existing portfolio of projects to reduce the throw-forward to five years or less; (ii) promotion of higher value addition in exports and, to that end, rebates should be linked to the rate of increase in exports rather than the level; (iii) fiscal policy to level the playing field between tradable and the non-tradable sectors. The current incentive structure favours investment in the non-tradable sectors.
This should be corrected by expanding the tax net to include the services sector, make property taxes realistic and levy capital gains tax to prevent asset price bubbles in the non-tradable sectors; and (iv) the growth strategy has to proactively aim to reduce regional as well as sub-regional inequalities by actively targeting less-developed areas of the country, together with selecting sectors and sub-sectors for targeted development over the next 5 years through rebates, tax relief, establishment of a one window export documentation board, infrastructure development, marketing and R and D support, and removal of import restrictions.
