Budget in tough times
By Shahid Javed Burki
Tuesday, 23 Jun, 2009
THESE are extremely difficult times for Pakistan. It is not only the challenge thrown at the state by Islamic extremists that has caused so much anxiety inside and outside the country.
Many people that have influence in shaping world politics have called this challenge an “existential threat” for the country, with high-ranking US officials issuing the warning that unless Islamabad realises the enormity of the threat extremism poses to the very existence of the country, Pakistan could simply unravel.
There is certainly some exaggeration in this assessment; it was made, most probably, to draw the attention of policymakers in Islamabad. It seems to have served that purpose. Last month the military was ordered into Swat and it seems to have taken the area back from the extremists. The armed forces have now been told to go after the leadership of the Taliban.
There is a reason why I have begun this article on the budget with a reference to the ongoing struggle between the state and non-state actors and why I said that extremism is not the only problem the country faces. There is also the problem of an economy that has suffered perhaps the most severe shock in the country’s history.
The budget is supposed to address that situation and bring the economy back to health — or at least set the stage for its recovery. In an earlier article in this space a few weeks ago I had suggested that the gross domestic product is not likely to grow by more than 2.5 per cent in 2008-09, half the rate that was then predicted by the government. Now the government’s own estimate is that the rate of GDP growth will be only two per cent. I am recalling this in order to underscore an important way in which downturns grip economies. When a decline occurs it usually takes the economy down fast. This is precisely what has happened in Pakistan. When the final numbers for 2008-09 are posted, I will not be surprised if the GDP growth is even lower than the one indicated in the Pakistan Economic Survey 2008-09, released a few days before Hina Rabbani Khar made the budget speech in the National Assembly. In fact, the economy may not show any increase at all.
Reviving the economy, therefore, is an urgent task for the government. If it succeeds, this will aid its efforts against extremism. If it fails it will only drive more young people towards extremist causes. This is one reason why the two struggles — against extremism and economic stagnation — are tied so closely together. Failure of one will lead to the failure of the other.
Although Ms Khar in her speech tried to draw some cheer from an otherwise cheerless situation, it was a sombre message she communicated to her audience. What she thought should bring comfort to those who were desperate to see Pakistan modernise rather than be shoved back into the Middle Ages was the fact that she was the first woman in the country’s history to present the budget in an Assembly presided over by the first-ever woman to serve as speaker. “These are important milestones in our quest for women empowerment and gender equality,” she told the Assembly.
Does the budget reveal a strategy aimed at economic revival? I believe given the grim situation the country is confronted with, the government has done a credible job of focusing on the right areas. I can identify six of them, two of which I will discuss today and the others later.
First, the government has pointed out to the people the enormous cost to the economy of continuing terrorism. This should certainly help in building support for the action by the army. According to Ms Khar, the cost to the economy is of the order of $35bn since 2001-02, an average of $6bn a year. And it is increasing. “We have to meet the maintenance and rehabilitation costs of almost 2.5 million brothers, sisters and children displaced as a result of the insurgency,” she said.
The government has allocated $6.25bn for “relief, rehabilitation, reconstruction and security” as part of its relief effort. This is equivalent to 3.4 per cent of GDP. Adding that to the cost of terrorism means that the fight against extremism is costing the country 6.7 per cent of GDP. Commitments from its own resources notwithstanding, the government is banking on receiving a fairly generous amount of assistance from the international community. The message from Islamabad, in other words, is clear. The war against terrorism is not just Pakistan’s war. It is a war being fought on Pakistani territory on behalf of the world. The country is prepared to sacrifice but it is incumbent upon its many friends to be generous in providing financial assistance. The country did not need foreign soldiers but foreign aid.
This indeed was the second message of the speech. Pakistan recognised that it had not done enough to raise domestic resources for investment and growth. “In the outgoing year we were only able to attain tax revenues equivalent to nine per cent of our GDP,” said Ms Khar. A number of actions were indicated that would be taken to remedy the situation but that would take time. Read any speech by a Pakistani finance minister over the last two to three decades and one can find many references to the need to increase the tax base and reform the tax collection system. Many development agencies have written reports on how the tax-to-GDP ratio could be improved.
None of this has worked. The trend continues to be downward which means that growth in the economy depends upon the ability to raise resources from outside the country. This is what has produced a roller-coaster ride for the economy. The economy does reasonably well when large amounts of external flows are available. The growth plunges when external savings decline. The fact that this time around the rate of increase in GDP has declined significantly despite the flow of large amounts of foreign money is even more worrying.
Some simple arithmetic would illustrate Pakistan’s dependence on foreign flows. If the war against terrorism is costing the country 6.7 per cent of GDP and if the expenditure on one of the programmes aimed at caring for the poor — the Benazir Income Support Programme — is to cost 0.6 per cent of GDP, then not much is left with the government — only 2.3 per cent of GDP —– even if it raises the tax-to-GDP ratio to 9.6 per cent. The situation, in other words, is grim from the perspective of government finance.