LAHORE: Government’s heavy borrowing from domestic sources is crowding out manufacturing sector that is reeling under liquidity crunch.
Public sector’s spending on infrastructure developments is leading to economic growth and expansion in services sector.
But, time is not far when increasing interest rates and inflation would become an outcome of the fiscal borrowing. It is indeed a failure of the government’s fiscal policy.
Banks are pleased to give credit to the government at Karachi Inter-Bank Offered Rate plus two percent without any risk of default. Government is squeezed of funds to even meet its general non-development expenditures and when funds are not available it axes the development expenditures.
Development expenditure is, in fact, an investment that stimulates growth. Our development budget is financed through borrowing that limits the development expenditures to less than two percent of GDP. In a developing economy like Pakistan, the development expenditures should be at least 3.5 to four percent of GDP.
Inefficiencies in public sector have not been addressed during the past four years. The power distribution companies continue to post heavy line losses, which are subsidised by the state. It is a painful fact that the power sector’s revenue losses are due to heavy line losses as well as non-recovery of bills. What is more regretful is that the power defaulters continue to get electricity supply.
Subsidy meant for the poor is distributed to all segments of the society. Power subsidy should be targeted. Government has already identified six million poor families through Benazir Income Support Program.
All consumers should pay electricity bill without any subsidy and only the poor should get the power subsidy.
Industrial consumers should be preferred over other domestic consumers to keep the wheel of the employment-generating manufacturing sector moving.
Presently, Pakistan International Airlines and Pakistan Steel Mills are in worst condition than they were four years back. There has been some improvement in the operation of Pakistan Railways, but it is still much below to make the Railways a self-sustainable organisation.
With high fiscal deficit no one should expect an immediate turnaround. Government should first ensure that fiscal deficit does not exceed five percent of GDP.
Actually, budget deficit should cover government liabilities that are parked elsewhere. Circular debt of more than Rs500 billion is a government liability that should immediately be cleared through borrowing or any other means and the figure should be considered part of a fiscal deficit.
Refunds of businessmen are also government liabilities that should be paid immediately.
In order to make up for infrastructure deficiencies, some projects equivalent in value to at least one percent of GDP should transparently be executed under public-private partnership.
After achieving macroeconomic stability the planners should support growth that aims to redistribute the benefits to poor. All general subsidies, including financial assistance given to fertiliser sector and power consumers should be replaced with targeted subsidies.
Priority should be given to education, health, and drinking water supply. All new recruitments in government departments – except of teachers and health care staff – should immediately be frozen.
Currently the inflation is moving up and there is no way that interest rates could be lowered. Chances of reduction of unproductive wasteful expenditure in an election year are also dim.
Growth under the present circumstances is likely to remain under immense pressure.
Banking sector is posting healthy profits, but the smaller banks are finding it hard to stay afloat. Smaller banks in Pakistan should be merged.
There should not be more than 15 to 20 banks in Pakistan. Small banks with lower access to technology and small capital base cannot compete with the larger banks.