sparklingway
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Seems the PM was given a very honest and highly cautionary state of the economic affairs in the Q Block. It must have required beyond the honesty of Dr. Sheikh to give such a true picture of the national economy since Q Block babus are amongst the best sycophants in the world.
By Khaleeq Kiani
Tuesday, 13 Jul, 2010
ISLAMABAD: While the rest of the country was fixated on the face-off between the media and the PML-N, Prime Minister Yousuf Raza Gilani was provided a reality check last week about the precarious economic situation in the country.
He was warned by the finance ministry that with the fiscal deficit touching 6.2 per cent of GDP (Rs925 billion) last year, the government ran the risk of IMF backing out unless it earned Rs500 billion through additional revenue or reduce its expenditures drastically during the current fiscal year.
More serious still, he was informed that the only way of controlling expenditures was to ask the provinces not to exercise their powers to raise additional funds under the new NFC award.
This was the gist of the message hammered home during a presentation by Finance Minister Dr Abdul Hafeez Shaikh and his team to the prime minister during his visit to the ministry.
A major headache in this regard, Dawn has learnt, is the overall fiscal situation which can deteriorate because of inter-corporation circular debt. This, according to the finance ministrys estimates, will take a 25-30 per cent hike in electricity tariff during the current financial year to breakeven on this count.
However, what makes this crisis unpredictable is that an increase in international oil prices or Pakistans failure to produce estimated amount of gas and hydel energy (which would mean more thermal energy and hence more oil) can push these numbers higher.
No wonder then that the World Bank and the IMF, sources told Dawn, had estimated a 49 per cent increase in electricity rates.
As a result, the government has no choice but to check its spending and improve revenue collection. The prime minister was informed that the government had exhibited little fiscal responsibility and failed to limit debt for the third year running because of financial indiscipline by the provincial governments.
Hafeez Sheikh and his team pointed out that the provincial governments, which were expected to provide a surplus of about 0.6 per cent of GDP during the last financial year, ended up with deficits.
The Punjab government closed its accounts with a Rs38 billion deficit, followed by Sindh at Rs27 billion and Balochistan Rs7 billion.
As a result, the provincial governments together contributed about one per cent to the overall fiscal deficit of 6.2 per cent instead of helping to meet the 5.1 per cent target agreed with the IMF.
The prime minister was also informed that Federal Board of Revenue had missed the revenue collection target by about Rs70 billion, excluding over Rs50 billion of refunds. The total revenue shortfall, therefore, remained in excess of Rs120 billion. If the refunds were also excluded, the fiscal deficit could be close to Rs1,000 billion.
MORE BAD NEWS: The bad news for the prime minister did not end here. He was informed that the economic situation could further worsen because of the strong parliamentary opposition to the value-added tax (VAT).
The reformed general sales tax could also face practical and administrative hiccups in case the Sindh government did not drop it insistence on collecting the tax on services.
And if the government fails to introduce the uniform reformed GST across the country, it should stop counting on the IMF programme under which more than $2 billion is still to be transferred to Pakistan. As a consequence, the country will not be able to get bilateral and multilateral financial support, increasing the chances of a default.
Mr Gilani was told that if the government wanted to avoid this situation it would have to persuade the provincial governments to check expenditures and prepare themselves for additional revenue generation.
The problem the government may face is that the finance ministry cannot rein in the provinces and force them to spend less or to reduce their federal transfers in view of a consensus NFC award.
Therefore, the prime minister had been requested to persuade the provinces to limit their spending to the last years level, notwithstanding additional shares they had thanks to the new NFC award to generate a surplus of at least 1.5 per cent of GDP (which translates to about Rs170 billion), the sources said.
According to the sources, the prime minister assured the finance ministry officials that he would raise the matter with chief ministers on Tuesday.
Dr Ashfaque H Khan
The finance team, led by Dr Abdul Hafeez Shaikh, gave a frank and blunt presentation on the state of the economy in general and the budget and its financing difficulties in particular to the prime minister during his first visit to the Ministry of Finance on July 9. The timing of such a candid presentation was important because Pakistan has just entered a new fiscal year and a month-long engagement with the IMF to review the existing programme is about to begin.
The presentation to the prime minister was exactly in line with my assessment of the state of finances that I have been sharing with the people of Pakistan through my columns. The finance team informed the prime minister about the deleterious condition of the country's finances owing to the fiscal profligacy of the federal and provincial governments. Budget deficit for the year 2009-10 ended at 6.2 per cent of GDP as against the target of 4.9 per cent for which the government will have to seek waiver from the IMF.
The prime minister was also informed that the display of stunning financial indiscipline by the provincial governments and the political leadership have already created serious difficulties for the finance team in achieving fiscal deficit target of 4 per cent of GDP for the year 2010-11. Unless corrective measures are taken quickly, the budget deficit is likely to be in the range of 6.5-7.0 per cent of GDP in 2010-11. The prime minister was bluntly told that the politicisation of VAT has added further fuel to the fire. If Pakistan fails to implement VAT or refined GST on October 1, 2010 it will face serious consequences. There will be no money from the IMF, the World Bank, the Asian Development Bank and perhaps from the Kerry-Lugar Act. The consequences of going off the IMF Programme were explained to the prime minister in greater details.
The prime minister was also informed as to how the bleeding of the eight public-sector enterprises (PSEs) is damaging the economy and budget. Restructuring and then privatising these PSEs within the next two-three years are the only solution for which the finance team would require political support.
The prime minister should immediately call the meeting of the chief ministers of the provinces and the heads of the political parties that have representation in parliament, and ask his finance team to give them a frank assessment of the state of finances. The outcomes of the presentation must include; (i) provincial governments committing to deliver a surplus of 1.5 per cent of GDP by cutting expenditures;(ii) the prime minister downsizing the federal cabinet to 20-25 ministers; (iii) allocation under the Benazir Income Support Programme be reduced to the actual spending of last year; (iv) rationalising allocation for the IDPs and (v) reducing subsidies to bare minimum. In short, the outcomes should be one of austerity at all levels of governments.
The above listed measures are of short-to-immediate nature but Pakistan's key economic challenges are structural and require inter-ministerial coordination to address them. Finance Minister Dr Abdul Hafeez Shaikh is one of the many cabinet ministers and has no control over the workings of other economic ministries. It is the finance minister who deals with the IMF and other International Financial Institutions (IFIs) and is responsible for implementing their programmes, which require inter-ministerial support.
How to streamline the workings of the economy of Pakistan? In East Asia, the economic planning minister (finance minister) is also the deputy prime minister, in charge of several economic ministries. The prime minister deals with political (domestic and external) issues while the deputy prime minister handles the economy. In Pakistan, we do not have the provision for deputy prime minister; therefore, the prime minister may appoint Dr Shaikh as senior minister for economy, in charge of commerce, industry, water and power and petroleum and natural resources in addition to his current portfolio of finance planning, economic affairs and statistics. As senior minister, Dr Shaikh will coordinate and chair the meetings of the economic ministries. It will quicken the process of decision-making and help improve economic governance.
The finance minister has already pointed out in his budget speech that he intends to restructure the PSEs in 2010-11 to make them attractive for privatisation going forward. The PSEs are bleeding and have become a permanent burden to the budget. The government has spent Rs245 billion in 2009-10 to keep these PSEs afloat. How long can the government keep pumping taxpayers' money to finance the inefficiencies of the PSEs? The quicker these are restructured and then privatised, the better it is for the budget and the economy. There are vested interests which will be opposing privatisation of these PSEs. Dr Shaikh as finance minister alone may not succeed in his efforts but as senior minister he may succeed in restructuring and then privatising these loss-making institutions.
The writer is director general and dean at NUST Business School, Islamabad. Email: ah khan@nbs.edu.pk
By Khaleeq Kiani
Tuesday, 13 Jul, 2010
ISLAMABAD: While the rest of the country was fixated on the face-off between the media and the PML-N, Prime Minister Yousuf Raza Gilani was provided a reality check last week about the precarious economic situation in the country.
He was warned by the finance ministry that with the fiscal deficit touching 6.2 per cent of GDP (Rs925 billion) last year, the government ran the risk of IMF backing out unless it earned Rs500 billion through additional revenue or reduce its expenditures drastically during the current fiscal year.
More serious still, he was informed that the only way of controlling expenditures was to ask the provinces not to exercise their powers to raise additional funds under the new NFC award.
This was the gist of the message hammered home during a presentation by Finance Minister Dr Abdul Hafeez Shaikh and his team to the prime minister during his visit to the ministry.
A major headache in this regard, Dawn has learnt, is the overall fiscal situation which can deteriorate because of inter-corporation circular debt. This, according to the finance ministrys estimates, will take a 25-30 per cent hike in electricity tariff during the current financial year to breakeven on this count.
However, what makes this crisis unpredictable is that an increase in international oil prices or Pakistans failure to produce estimated amount of gas and hydel energy (which would mean more thermal energy and hence more oil) can push these numbers higher.
No wonder then that the World Bank and the IMF, sources told Dawn, had estimated a 49 per cent increase in electricity rates.
As a result, the government has no choice but to check its spending and improve revenue collection. The prime minister was informed that the government had exhibited little fiscal responsibility and failed to limit debt for the third year running because of financial indiscipline by the provincial governments.
Hafeez Sheikh and his team pointed out that the provincial governments, which were expected to provide a surplus of about 0.6 per cent of GDP during the last financial year, ended up with deficits.
The Punjab government closed its accounts with a Rs38 billion deficit, followed by Sindh at Rs27 billion and Balochistan Rs7 billion.
As a result, the provincial governments together contributed about one per cent to the overall fiscal deficit of 6.2 per cent instead of helping to meet the 5.1 per cent target agreed with the IMF.
The prime minister was also informed that Federal Board of Revenue had missed the revenue collection target by about Rs70 billion, excluding over Rs50 billion of refunds. The total revenue shortfall, therefore, remained in excess of Rs120 billion. If the refunds were also excluded, the fiscal deficit could be close to Rs1,000 billion.
MORE BAD NEWS: The bad news for the prime minister did not end here. He was informed that the economic situation could further worsen because of the strong parliamentary opposition to the value-added tax (VAT).
The reformed general sales tax could also face practical and administrative hiccups in case the Sindh government did not drop it insistence on collecting the tax on services.
And if the government fails to introduce the uniform reformed GST across the country, it should stop counting on the IMF programme under which more than $2 billion is still to be transferred to Pakistan. As a consequence, the country will not be able to get bilateral and multilateral financial support, increasing the chances of a default.
Mr Gilani was told that if the government wanted to avoid this situation it would have to persuade the provincial governments to check expenditures and prepare themselves for additional revenue generation.
The problem the government may face is that the finance ministry cannot rein in the provinces and force them to spend less or to reduce their federal transfers in view of a consensus NFC award.
Therefore, the prime minister had been requested to persuade the provinces to limit their spending to the last years level, notwithstanding additional shares they had thanks to the new NFC award to generate a surplus of at least 1.5 per cent of GDP (which translates to about Rs170 billion), the sources said.
According to the sources, the prime minister assured the finance ministry officials that he would raise the matter with chief ministers on Tuesday.
A candid presentation
Tuesday, July 13, 2010Dr Ashfaque H Khan
The finance team, led by Dr Abdul Hafeez Shaikh, gave a frank and blunt presentation on the state of the economy in general and the budget and its financing difficulties in particular to the prime minister during his first visit to the Ministry of Finance on July 9. The timing of such a candid presentation was important because Pakistan has just entered a new fiscal year and a month-long engagement with the IMF to review the existing programme is about to begin.
The presentation to the prime minister was exactly in line with my assessment of the state of finances that I have been sharing with the people of Pakistan through my columns. The finance team informed the prime minister about the deleterious condition of the country's finances owing to the fiscal profligacy of the federal and provincial governments. Budget deficit for the year 2009-10 ended at 6.2 per cent of GDP as against the target of 4.9 per cent for which the government will have to seek waiver from the IMF.
The prime minister was also informed that the display of stunning financial indiscipline by the provincial governments and the political leadership have already created serious difficulties for the finance team in achieving fiscal deficit target of 4 per cent of GDP for the year 2010-11. Unless corrective measures are taken quickly, the budget deficit is likely to be in the range of 6.5-7.0 per cent of GDP in 2010-11. The prime minister was bluntly told that the politicisation of VAT has added further fuel to the fire. If Pakistan fails to implement VAT or refined GST on October 1, 2010 it will face serious consequences. There will be no money from the IMF, the World Bank, the Asian Development Bank and perhaps from the Kerry-Lugar Act. The consequences of going off the IMF Programme were explained to the prime minister in greater details.
The prime minister was also informed as to how the bleeding of the eight public-sector enterprises (PSEs) is damaging the economy and budget. Restructuring and then privatising these PSEs within the next two-three years are the only solution for which the finance team would require political support.
The prime minister should immediately call the meeting of the chief ministers of the provinces and the heads of the political parties that have representation in parliament, and ask his finance team to give them a frank assessment of the state of finances. The outcomes of the presentation must include; (i) provincial governments committing to deliver a surplus of 1.5 per cent of GDP by cutting expenditures;(ii) the prime minister downsizing the federal cabinet to 20-25 ministers; (iii) allocation under the Benazir Income Support Programme be reduced to the actual spending of last year; (iv) rationalising allocation for the IDPs and (v) reducing subsidies to bare minimum. In short, the outcomes should be one of austerity at all levels of governments.
The above listed measures are of short-to-immediate nature but Pakistan's key economic challenges are structural and require inter-ministerial coordination to address them. Finance Minister Dr Abdul Hafeez Shaikh is one of the many cabinet ministers and has no control over the workings of other economic ministries. It is the finance minister who deals with the IMF and other International Financial Institutions (IFIs) and is responsible for implementing their programmes, which require inter-ministerial support.
How to streamline the workings of the economy of Pakistan? In East Asia, the economic planning minister (finance minister) is also the deputy prime minister, in charge of several economic ministries. The prime minister deals with political (domestic and external) issues while the deputy prime minister handles the economy. In Pakistan, we do not have the provision for deputy prime minister; therefore, the prime minister may appoint Dr Shaikh as senior minister for economy, in charge of commerce, industry, water and power and petroleum and natural resources in addition to his current portfolio of finance planning, economic affairs and statistics. As senior minister, Dr Shaikh will coordinate and chair the meetings of the economic ministries. It will quicken the process of decision-making and help improve economic governance.
The finance minister has already pointed out in his budget speech that he intends to restructure the PSEs in 2010-11 to make them attractive for privatisation going forward. The PSEs are bleeding and have become a permanent burden to the budget. The government has spent Rs245 billion in 2009-10 to keep these PSEs afloat. How long can the government keep pumping taxpayers' money to finance the inefficiencies of the PSEs? The quicker these are restructured and then privatised, the better it is for the budget and the economy. There are vested interests which will be opposing privatisation of these PSEs. Dr Shaikh as finance minister alone may not succeed in his efforts but as senior minister he may succeed in restructuring and then privatising these loss-making institutions.
The writer is director general and dean at NUST Business School, Islamabad. Email: ah khan@nbs.edu.pk
