One thing that distinguishes the current regime from its predecessor is the extent of its fiscal indiscipline. Never in the history of this country has the nation seen such a fiscally irresponsible government. They have maintained a large budget deficit year-after-year over the last five years, and accordingly more than doubled the country’s public debt ably assisted, of course, by the exchange rate depreciation. Accordingly, they damaged a relatively robust economy in a short span of five years without guilt and shame.
Because of unwillingness to mobilise resources on the one hand and reckless spending on the other along with an unconsidered NFC Award, Pakistan’s fiscal balance has been destroyed thoroughly in the last five years. The nation will witness further instances of financial hara-kiri in the last two weeks of the present regime the impact of which will continue to haunt the economy in the years to come.
The reckless doling out of the country’s financial resources and jobs and the arbitrary appointments of ineligible people to key institutions including financial ones are unprecedented in magnitude. The extent of financial damage in the shape of power sector subsidies, bailout packages for the rotten PSEs, BISP, circular debt, etc will not be fully known until several months have passed after the exit of the present regime.
A race has begun between the federal and provincial governments to implement senseless policies. Recent examples include abolishing the condition of having a National Tax Number (NTN) to purchase a new car – a move, which is contrary to the rhetoric of broadening the tax base; appointing unqualified people in the board of directors of the State Bank of Pakistan (SBP); making hundreds of thousands of contractual employees permanent; and giving hundreds of thousands rupees interest free to the so-called youth.
The planning commission has become a hub for ministers and key parliamentarians, as they are seen moving around on different floors seeking approval for their projects and release of funds. The deputy chairman of the planning commission is obliging them.
Doling out resources in such a fashion in the name of bestowing benefits to the people of Pakistan at the fag end of the tenure is shameful. Can the exchequer of this poor nation afford to bear the burden of such reckless spending? They are destroying the country’s finances for ‘winning’ elections and even if they ‘win’, there will be hardly anything left to govern. The only available source of funding would be the printing machine to ‘print’ local currency. Is this what we are waiting for?
A government that indulges in reckless spending in the name of helping the people at the end of its tenure is acknowledging its own failure. Since its leaders have failed to deliver during their tenure, they are attempting to curry favour by securing votes through reckless spending in the last few days of the government’s term. This is nothing short of an admission of a grand failure.
What will be the consequences of this financial hara-kiri for the budget deficit of the ongoing fiscal year? The present regime inherited a budget deficit of 7.4 percent of GDP in 2007-08. They would certainly leave the government by making a much bigger hole in the budget 2012-13 – an unprecedented void in Pakistan’s fiscal history.
In my article printed on September 25, 2012, I analysed budget 2012-13 in greater depth. In my view the budget was prepared in a casual manner with fragile numbers. The budget makers were not serious; did not do their homework, and simply tried to put together irrelevant numbers in a hurry.
It was clear that the budget for 2012-13 would die its natural death within a few months of being made public. Based on the assessment of revenue and expenditure and keeping in view the election year, fiscal deficit for the year was projected in the range of 8.0-8.5 percent of GDP. The recent developments have defied even my cautious assessment. It is therefore safe to argue that budget deficit in the current year may reach a level not seen before in Pakistan, with severe macroeconomic consequences. There are calculations made by different sources, which suggest that budget deficit could swell to 11 percent of GDP in 2012-13.
As stated above, the extent of damage caused by the current financial hara-kiri will not be known until next year. This is a horrendous development in the making. In such eventuality, Pakistan may face a Greece-like debt crisis.
In fact, Pakistan is already facing a serious debt repayment crisis. The SBP’s own statistics show that Pakistan will witness net drains on foreign currency assets in terms of loan repayments during January-December 2013 to the extent of $6.458 billion. Against the SBP’s foreign exchange reserves of $8 billion, it has bought $2.325 billion in forward market from commercial banks. In other words, to protect its reserves, the SBP has borrowed $2.325 billion from commercial banks and continues to refinance it. Hence, either the SBP’s or commercial banks reserves are overstated to the extent of $2.325 billion.
Is there still any doubt that Pakistan is not facing a debt crisis? The governor of the SBP has not only misguided the Ministry of Finance but also the political leadership by not revealing the truth. I would urge the readers as well as the governor to read Dr Muhammad Yaqub’s article ‘The office of denial’ (March 2) to ascertain the facts.
The current financial hara-kiri will simply speed up the crisis. The caretaker government will have serious difficulties in managing the country’s finances during April-June. The post-election government will face the real music of unprecedented profligacy and the people of Pakistan will continue to suffer in years to come. In the meantime, the rot continues and the race to the bottom goes on.
The writer is principal and dean at NUST Business School (NBS) Islamabad.