Dr Ashfaque H Khan - Tuesday, August 28, 2012
From Print Edition
As in the fiscal year 2007-08, the current year (2012-13) is also likely to see three governments in Pakistan – the incumbent, the caretaker and a new government after the election. Like 2007-08, the current year is bound to see policy inaction and populist measures taken by the government to ‘win’ the forthcoming elections. As 2007-08 was the harbinger of pain and misery for the people of Pakistan, the year 2012-13 looks set to bring more economic devastation due to a variety of reasons.
Firstly, Pakistan’s economy was in relatively healthier condition prior to 2007-08. Secondly, macroeconomic management was relatively sound and the economy was at the top of the agenda of the then government. Thirdly, Pakistan’s relations with the IFIs, including the IMF, was fairly cordial. Fourthly, the external economic environment prior to 2007-08 was hospitable. Even with such relatively sound economic conditions, the events of 2007-08 damaged the economy significantly.
Pakistan has already entered in the second month of the fiscal year 2012-13. Economic conditions have never been in such a worse shape as they are now, as a result of five years of mismanagement. The external economic environment is inhospitable and likely to worsen in the coming months. Pakistan’s relation with the IFIs, including the IMF, has deteriorated. Against the backdrop of worsening economic conditions, the economic management of 2012-13 is likely to cause irreparable damage to the economy.
The current fiscal year is an election year. The government has already presented a ‘ballot’ budget and the SBP has recently announced a ‘ballot’ monetary policy. These are deadly combinations for the economy. The external balance of payments is also likely to come under pressure owing to heavy debt repayments, financing of large current account deficit and declining debt and non-debt creating inflows. The victim will naturally be the exchange rate with a range of adverse consequences for the economy.
What is there in store for the economy in 2012-13? Before we answer this, it is essential that we summarise the state of the economy as it stands at the beginning of 2012-13. Lack of vision, direction, commitment, knowledge and understanding of Pakistan’s economy has destroyed the economy during the last four and a half years. By the end of the last fiscal year (2011-12), Pakistan’s economic growth slowed to an average of 3 percent per annum, equalling less than one-half of the average of 2002-07. Domestic investment hit a 60 years low and domestic saving experienced an unprecedented fall. Side by side, foreign private investment collapsed and inflation hovered in high double-digits with a corresponding deterioration in the business environment, unemployment and poverty figures and relations with the IFIs.
The root cause of our economic destruction has been the policy of ‘reckless borrowing and ruthless spending’ pursued by the government. The country has never witnessed such a level of fiscal profligacy with budget deficit touching 8.5 percent of the GDP in 2011-12. Resultantly, public debt has more than doubled in the last five years and consumed a bulk of tax revenue as interest payments. Non-availability of sufficient resources for social sector and infrastructure has resulted in the deterioration of education and health systems, crumbling of the infrastructure and worsening of the power crisis.
In short, by the end of 2011-12, Pakistan’s economy resembled a patient in intensive care unit fighting desperately for survival. To extend the analogy, the economic ‘doctors’ are least bothered about their ‘patient’. Should we expect any change in their attitude towards their patient (economy) at the tail end of their shift? Through the ‘ballot’ budget and ‘ballot’ monetary policy, the government has already revealed its preferences. Fiscal indiscipline is likely to attain new heights in 2012-13. Resources will be doled out to ‘win’ election in the name of ‘taraqiati programme’ (development budget).
No efforts will be made to mobilise additional resources by broadening the tax base and rationalising expenditure. No attempts will be made to address the issues of the NFC Award which has rendered the fiscal policy ineffective as a tool of the stabilisation policy. The ‘ballot’ budget 2012-13 failed to touch upon several key issues including agricultural income being drawn under the direct tax net, implementation of RGST, reforming of the petroleum sector taxation, bleeding PSEs, circular debt and strengthening of tax administration.
The SBP has also revealed their preferences by presenting a ‘ballot’ monetary policy recently. They made the life of the government much easier by reducing the financing cost of the budget deficit. We have learnt as students of economics that budget-deficit represents the excessive demand in the economy, which will translate in higher imports thus worsening the current account balance.
A budget deficit of 8.5 percent of the GDP in 2011-12 clearly reflects the prevalence of excessive demand in the economy. Can any central bank around the world reduce discount rate by 150bps in the midst of excessive demand?
Where is the hard earned autonomy of the SBP? Why has the SBP chosen to become subservient to the fiscal authority (ministry of finance)? The SBP must accept that they have simply implemented the politically motivated decision of the ministry of finance to please businessmen. Should we expect the private sector to increase investment as a result of decline in the discount rate in the absence of power and gas and deteriorating security environment? Or should we expect more activity in the stock market with no real impact on the economy or encouragement of hoarding and speculation?
It is safe to admit that in the presence of the ‘ballot’ budget and ‘ballot’ monetary policy, the economic condition is likely to worsen in 2012-13. The cost, as always, will be borne not by those at the helm of the country’s affairs but by the already economically crippled common man whose hopes for a better future lie all but shattered.
The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk
