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Opinion

January 11, 2011

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Pitfalls of a lame-duck govt

Pitfalls of a lame-duck govt
Under the pressure of its allies and opposition in parliament, the government has reversed its own decision of passing on the high cost of international fuel prices to domestic consumers. By backtracking on the fuel prices the government has attracted severe criticism from all those who have interest in Pakistan’s economy. In so doing, the government has exposed itself as being a lame-duck government, desiring to stick to power at any cost and willing to be driven by the opposition’s agenda. It has also lost its credibility in the eyes of the international financial institutions.
The natural outcome of the government’s profligacy has been the unprecedented surge in public and external debt and loss of national sovereignty. The economic team is equally responsible for acceleration of the economic meltdown. The members of the team had been brought in to improve the economic health of the country. The team failed to make sufficient effort or display the work hard required.
The economic team failed to draw the line between profligacy and discipline, between bad and good economics, between reforms and status quo, and between expenditures of political and economic priorities. The economic team did not take any stand when the cabinet approved a 50-per-cent increase in the salaries of government servants, at a time when the country was facing severe financial difficulties. They just kept quiet and became party to this profligacy.
The team actively accommodated the Multan and Larkana Packages in the PSDP, but took no time in cutting the budget of higher education. In the process, they lost respect in the eyes of most educated members of the society. Despite its promises before the National Assembly to restructure eight rotten public-sector enterprises (PSEs) in 2010-11, the economic team hardly made a move in that direction. On the contrary, the political leadership continued to appoint people in these rotten PSEs in the thousands, putting enormous financial strain on the already bankrupt institutions. The economic team had no guts to say no to the political leadership, and as such became party to bad governance.
Despite the bad financial health of the Banks of Punjab and Khyber before us, the economic team, including the governor of the State Bank of Pakistan, gave the license to the government of Sindh to set up Sindh Bank, with Rs10 billion’s capital. At a time when bank mergers are taking place in Pakistan, the setting up of yet another public-sector bank was a bad decision. The new bank’s fate will not be different from the fates of the banks mentioned above. A bailout from budgetary resources cannot be ruled out.
The RGST debacle can be traced back to the economic team. Failure to communicate effectively with people through the print and electronic media, and with all the stakeholders, in public language, to defend the tax in public debate, lack of preparation in answering questions on TV talk shows are some of the factors responsible for the debacle. Like the government, its economic team has also become lame-duck and would be ineffectual, with serious consequences for the economy.
What will be the economic consequences of withdrawing the fuel price hike? Firstly, at the current international price of oil, the revenue shortfall will be Rs5 billion per month. The government has a collection target of Rs110 billion on this account in the 2010-11 budget. The government has thus far collected Rs35 billion and the remaining Rs75 billion is to be collected in the next six months. Under the assumption that the international price of oil remains at the current level, there would be a Rs30 billion shortfall in PDL (non-tax revenue).
Secondly, the slippages on both the revenue and expenditure side are likely to take the current year’s budget deficit in the range of 7.5-8.0 per cent of GDP. In other words, Pakistan would need at least Rs1,300 billion to finance its fiscal deficit this year. With dwindling external inflows, the reliance for financing of deficit would be on the domestic side—more so on direct borrowing from the SBP. Thus, the printing machine of the SBP will keep on pumping money into the economy, with all the inflationary consequences of such an action.
Thirdly, the government thought that by withdrawing the fuel price hike it provided relief to the people. But through printing more money it will fuel inflationary pressure with serious consequences for the same people. Fourthly, there are indications that oil prices are likely to rise further in 2011 on account of the stronger than anticipated recovery of the world economy, including the United States’. The lame-duck government will not be able to pass on the high cost of energy to domestic consumers. This will be a replay of 2007-08, when the-then government, including the caretakers, did not pass on the high price of oil, and the country had to pay a high price for its inaction. The nation should therefore be ready for action replay.
Fifthly, the agenda of tax reform, including the RGST, is dead, and as such, Pakistan’s relations with the international financial institutions, including the IMF, appear to have become strained. In such an environment, external inflows to keep the economy afloat are likely to be affected. A lame-duck government and its economic team are very damaging for the economy. They have lost the capacity to take difficult decisions. Time is not on our side.

The writer is director general and dean at NUST Business School, Islamabad.
Email: [email protected]
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