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Worse to come
Dr Ashfaque H Khan
Tuesday, September 11, 2012
From Print Edition
Pakistan’s economy has been destroyed in less than five years with great precision, reflecting an unprecedented vulnerability within the annals of the country’s history. Has the economy reached rock bottom? The answer is ‘perhaps not.’ Although more destruction seems to be in the offing in the current fiscal year, what is surprising is that no one appears to be interested in salvaging the economy.
Those at the helm of affairs are least bothered. No one is protesting in the print and electronic media and civil society and intelligentsia appear to have given up. There are hardly any talk shows debating economic issues and print media seldom provides coverage of economic challenges. Additionally, civil society is not stirred enough to sponsor conferences/seminars on economic issues. The rich and powerful have protected themselves from economic meltdown, but the hapless masses have suffer and look likely to do so for the foreseeable future. Why do I see more destruction of economy in the current fiscal year? Firstly, Pakistan has been in the midst of a political turmoil for the last five years and this turmoil is expected to deepen further during the run up to the general elections. Political turmoil breeds uncertainty, which is inimical to growth, development and prosperity.
Secondly, the law and order situation and the security environment have deteriorated over the last five years contributing immensely to the destruction of the economy. These are likely to deteriorate further, particularly in the major growth centres of the country as we move forward towards general elections. The private sector has totally been devastated and lost confidence in the economic management of the government. They have already entered into the ‘wait and see’ mode, and would prefer to remain on the sideline and watch the developments on both political and security fronts as we move towards elections.
Thirdly, political uncertainty, worsening law and order situation and fractured security environment in the current fiscal year are a deadly combination for growth, development and prosperity. No nation has progressed in an atmosphere of political turmoil and a poor security environment. I don’t see these two elements improving in Pakistan in the current fiscal year; therefore economic deterioration is likely to continue.
Fourthly, fiscal indiscipline has been the hallmark of the government in the last four and a half years. A budget deficit of 8.5 percent of the GDP in 2011-12 is evidence of the persistence of fiscal profligacy. Expecting a government to behave in a fiscally responsible manner in the last few months of its tenure, when it refused to do so in the last four years, is tantamount to asking for the moon. Fiscal discipline is not the stuff of election year. By design or need, this is a year of reckless spending to ‘win’ elections.
Unfortunately, budget making has become a non-serious exercise in Pakistan. Experts within and outside the country have stopped taking our budget numbers seriously. For example, the Federal Board of Revenue (FBR) is targeted to collect Rs2381 billion in the current fiscal year (2012-13) from an imaginary tax collection of Rs1952 billion last year. Instead of Rs1952 billion, the FBR has collected Rs1881 billion in 2011-12 – a shortfall of Rs71 billion. Shouldn’t we revise the downward tax collection target for the FBR when the base of last year has changed?
My calculation suggests that the FBR may not collect beyond Rs2150 billion, thus leading to a shortfall of Rs231 billion. The government has provided power subsidy to the extent of Rs50 billion thus far against the target of Rs175 billion for the year. Is this number credible? Slippages in these two numbers are enough to suggest that the budget deficit target of 4.7 percent of the GDP for the current fiscal year is a meaningless number. The budget deficit for the year is likely to be in the range of 8.0-8.5 percent of the GDP.
Fifthly, the State Bank of Pakistan (SBP) has made the life of the government much easier by reducing the discount rate by 150 bps. No central bank around the world would reduce the discount rate to this tune in the midst of a budget deficit of unprecedented proportions. The action of the SBP is bound to worsen the current account deficit at a time when debt and non-debt creating inflows are already drying up. The financing of current account deficit would pose a serious challenge for the government as, in the absence of adequate flows, the deficit is likely to be financed by drawing down the foreign exchange reserves.
Pakistan’s foreign exchange reserves, which matter for balance of payments, stood at $10.394 billion on August 31, 2012, down from $10.799 billion at end-June 2012 – a decline of $405 million in just two months despite an injection of the $1.1 billion from the CSF. Pakistan is expected to repay $5.5 -6.0 billion including the IMF payment of $2.9 billion under external debt servicing in the current fiscal year. In the absence of any credible inflows, Pakistan’s foreign exchange reserves will decline to around $4.0-4.5 billion, which would hardly be sufficient to finance current account deficit for the year.
Imagine a country with hardly any foreign exchange reserves, a government least bothered about these developments and international economic and political environments hostile towards it. Under these circumstances, can Pakistan protect its national security? It is therefore safe to conclude on the basis of the above analysis that more destruction of the economy is in the offing. It is yet to reach rock bottom. Pakistan’s economic vulnerability is likely to peak in the current and the next year while we, as a nation, sit waiting for a miracle to happen. Is this the way to govern a country?
The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@ nbs.edu.pk
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