WEB DESK: Federal Finance Minister Ishaq Dar, while speaking at the launch of information and communication technology initiative took the opportunity yet again to trash the economic policies of the PPP-led coalition government and highlight what he maintains are significant achievements on the economic front spearheaded by him.
The Finance Minister cited a 4 percent budget deficit as internationally acceptable within two years of the Sharif administration and maintained that the incumbent government had raised the social protection allocations under the Benazir Income Support Programme from 40 billion rupees in the last budget presented by the PPP to 102 billion rupees in the current budget.
There is no doubt that a 4 percent budget deficit is widely regarded as sustainable; however, there are few independent economists who would accept this as a realistic figure. The budget estimates for the current year set a target of 4.3 percent deficit for the year and given Dar’s recent acknowledgement that revenue shortfall has been 40 billion rupees in just the first quarter one would understandably be sceptical about his deficit claim. His supporters may well argue that the recently announced tax measures to meet the shortfall must be taken into account; however, the fact is that these taxes are on imported luxuries and in this country with large swathes of porous borders a higher tax on luxuries would simply fuel smuggling. Or in other words, the revenue projections from the mini-budget would be a lot less than envisaged.
Be that as it may, Dar’s recent commitment to henceforth focus on growth must be supported; however, credible reports indicate that he has already agreed with the Fund to reduce development expenditure by 20 percent and in the likely event that he fails to meet the revenue target he will have to slash development expenditure again. Dar also claimed credit for raising allocations on BISP. This must be supported as it is a good safety net system commenced during the PPP-led coalition government; however a large part of funding for this programme comes from international donors and not from the budget itself.
There is also disturbing statistical evidence that suggests that the incumbent government has performed worse than its predecessor on three major macroeconomic indicators. First, borrowing from external as well as domestic sources has increased significantly; the State Bank of Pakistan website notes that up to September 2015 long-term debt was 56 billion rupees, short-term high interest bearing debt was 1.34 billion dollars and IMF debt was 4.5 billion dollars. The 2012-13 Economic Survey notes that long-term debt was 43.6 billion dollars, short-term debt 0.2 billion dollars and IMF loan 5.3 billion dollars. Clearly reliance on external sources has increased the long-term debt by 12.4 billion dollars during the past two and a quarter years and the short-term debt by 1.14 billion dollars. The figure does not include the 2 billion dollar Eurobonds and one billion sukuk, issued at rates well above the prevailing global rates. Domestic debt was around 2 trillion rupees in 2013 and is now estimated at 20.7 trillion rupees by the SBP. Given this data it is unfathomable for the Finance Minister to accuse the PPP-led coalition government of seeking assistance from the Friends of Democratic Pakistan while maintaining that his government has been able to meet the security operation costs through domestic sources.
Secondly, exports have plummeted in recent months reflective of the government’s insistence on an overvalued rupee with the objective of understating the rising external indebtedness. Exports increased by 3 percent in the first year of the incumbent government but declined by 4 percent in the second year and in July 2015 plummeted by 17 percent. There is no doubt that the continuing energy crisis as well as law and order issues remain mitigating factors and are impeding export growth, however, these factors were prevalent during the tenure of the PPP-led coalition government as well and hence this decline is highly disconcerting.
Finally, there is the matter of sustained poor governance in all sectors, including the Finance Ministry. The claims of a rise in tax-to-GDP ratio is attributable to (i) accounting jugglery with around 300 billion rupee collections shifted from non-tax revenue to other taxes; (ii) heavy reliance on withholding taxes on non-filers as a component of income taxes even though they are passed in their entirety to the consumers; (iii) sustained failure to reform the tax structure with campaigns of naming and shaming proving ineffective; and (iv) manipulating data to show a better performance.
However, Finance Ministry is not alone in poor governance. The power sector governance issues remain as is evident from a rising circular debt and heavier transmission and distribution losses relative to the region, barring war-torn Afghanistan. Other ministries suffer equally from poor governance. The time to take action is now with the incumbent government having completed half of its term. Unfortunately, though, an extremely biased briefing in favour of the cabinet members appears to continue to satisfy the prime minister who has yet to take steps to bring in a more effective and efficient team.