May 8, 2012
Dr Muhammad Yaqub

The next budget will be presented to the National Assembly within a month. It will be rubber stamped by parliament without any meaningful debate or critical appraisal. Soon after its passage, it will stand shelved in the ministry of finance and the fiscal affairs and economy will be managed as before without any regard to what was presented to, and passed by, the NA.

The budget will represent a continuity of the failed policies of the last four years rather than a fundamental shift in policies towards sound economic management, particularly keeping in view the fragile political environment that prevails at present and the weight of the forthcoming general election. There are, and will be, a lot of pre-budget activities, meetings, seminars and consultations but the forthcoming budget will be based even more on short-term political rather than long-term economic considerations. In the deafening noise of political sloganeering at the budget time, people should be prepared to face the music of another year of increasing economic hardship and misery.

In a parliamentary democracy, the finance portfolio is usually held by an effective and senior political leader of the ruling party. With the help of technocrats and bureaucrats, he makes a professional assessment of the state of the economy and the budget relying on accurate statistics, and presents sound economic policy proposals to steer the economy clear of any impediments to the realisation of its growth potential while ensuring relative price stability, budget sustainability and balance of payment viability. By sheer weight of personality in the political setup and soundly developed economic and budgetary policies such a finance minister can provide an effective leadership in economic matters to a government and a nation.

The present Pakistani government suffers from two fundamental flaws. First, while we have a parliamentary form of government on paper, the government is effectively being run by an individual residing in the presidency, in spite of the fact that constitutionally he is merely a figure head, as in India, and personally has no background in economics. Second, the PPP has always relied on “imported” finance ministers reflecting their naïve belief that technically more qualified imported finance team will be able to find politically convenient economic solutions to the difficult economic problems of the country, hoping that it will have a magic wand with which to solve economic problems without painful structural reforms on a sustained basis.

The imported finance team, having no political clout and no long-term vision, has followed rather than led the politicians in economic matters, and has ended up with statistical trickery, fiscal irresponsibility and short-term patch work landing the country in a deepening whirlpool of economic misery and chaos. The current finance minister, who has led the economic team for the last three/four years, has been engaged in precisely such a politically futile and economically irresponsible exercise.

The present economic team has indulged in several unpardonable professional sins during its tenure. Some of those are summarised below:

• The economic statistics have been “doctored” and defaced to the extent never witnessed before.

• The budget has been financed by printing of notes by the State Bank of Pakistan (SBP) at a scale never witnessed in the economic history of the country and by pre-emption of commercial bank credit by the public sector to the detriment of the private sector economic activity.

• The skyrocketing prices of individual items reflecting excessive money creation have not been allowed to reflect in price indices through changes in their base and commodity weight and use of below market prices of commodities in their construction.

• The national income statistics have been manipulated to show a rate of economic growth that suits the economic team in presenting a favourable picture of the state of the economy.

• The rising nominal GDP that basically represented a high rate of price inflation has been used to work out ratios that are selectively applied to conceal the underlying deterioration of economic and budgetary situation. For example, when rising debt-servicing was eating up a large part of the share in revenue of the federal government, it was stated by the finance minister that the country had no debt problem by relying on debt/nominal GDP ratio as an indicator of debt sustainability.

• When the federal revenue fell short of the targets, statistical jugglery and outright fraud were used to falsely show a higher revenue collection. Payments were held back to show lower expenditure. Wasteful government current expenditure was sustained by diversion of development expenditure towards politically popular current expenditure. All this jugglery served short term political purposes but undermined long term economic prospects.

• The country’s economic institutions have been be given to incompetent/corrupt hands and losses of public sector enterprises financed through government guaranteed bank borrowing has not been shown in the budget deficit. It gave a deceptive picture of the public finances but the underlying economic and financial situation has gone from bad to worse.

• The foreign exchange reserves have been inflated by including foreign currency deposits of commercial banks in official reserves. Whitening of black money by allowing their transfer through home remittances has been paraded as a great policy achievement. Foreign exchange reserves are kept at a high level by excessive borrowing from the IMF that is due for repayment in the next three years.

• Subsidies being provided to bank owners and private power companies owned by the politicians and their business associates have gone to the rich and powerful financed by the consumers and small savers leading to transfer of income from the poor to the rich and adding to economic inequality. The number of people below the poverty line has increased enormously without capturing them in poverty statistics.

The result of all this statistical trickery, fiscal gimmickry and economic manipulation is that the official economic statistics no more represent the true picture of the state of the economy.

It is such a distorted statistical setting and the state of the economy on which the next budget will be based and presented to parliament. It will be loaded with slogans with no substance in policy proposals and it is likely to leave behind an economy that is on the verge of external debt default and internal hyperinflation.

But the budget documents and the budget speech of the finance minister will have no resemblance with the actual situation and will revolve around false assertions. The budget will over estimate revenue from the existing taxation, understate expenditure, show a low budget deficit target, and make no mention of the massive losses of the public enterprises and in commodity operations. Such a presentation will be professionally false but that will not bother the professionals who will make those statements.

There will be no mention of bringing the agricultural sector, service sector and conspicuous consumption under the tax net. It will have a lot of implicit and explicit subsidies to the rich and hidden taxation of the poor but those will not be revealed in the budget.

It will promise lower interest rates and a stable exchange rate without explaining how it would be attained in an inflationary environment and with increasing balance of payment vulnerabilities.

There will be a boastful statement of reduced reliance on foreign aid and increased reliance on “domestic sources of financing” but without mentioning that those sources will basically be larger borrowing from the SBP and commercial banks which will fuel inflation further.

It will be declared a pro-poor and business friendly budget with no additional taxation, a lot of additional expenditure and less reliance on foreign assistance. The budget will boast of no new taxes, a number of tax concessions to business and industry, a number of dressed up economic relief measures for the poor, a high level of development expenditure, a falling inflation and satisfactory balance of payment outlook. Whether all these boastful statements will have anything to do with reality is another matter.

Such a deceptive budget will take the country to a state of high inflation and the potential of external debt default by the end of FY13.

The finance team of the next government, if it is different from the present one, will have to have professional competence, personal integrity, commitment to national interests, political support and good governance to steer the sinking ship of the economy out of deeply troubling waters.

The writer is a form
-The News