PPakistan’s economic managers seem least bothered about the ever rising budget deficit, diminishing hopes that the country might avoid picking up the begging bowl and knocking at the doors of the International Monetary Fund (IMF).
INSIGHT
PPakistan’s economic managers seem least bothered about the ever rising budget deficit, diminishing hopes that the country might avoid picking up the begging bowl and knocking at the doors of the International Monetary Fund (IMF).
Pathetically, the IMF has also been making efforts for entering into the political affairs of the country. Its country representative in Pakistan indicated this week that the Fund mission could hold article IV consultation even during the tenure of the caretaker setup, if Islamabad wished to move ahead by making a formal request to dispatch the mission during June 2018.
Does the IMF want to hold a policy dialogue with an interim setup to strengthen the already existing impression in the country that the caretaker might assume the reins of power for a longer period owing to a variety of reasons? The IMF must not indulge in such matters that are perceived as intervention into the political affairs of Pakistan.
First and foremost, the problem lies on our part as well. There is no rationale for economic decision-making at the moment, and contradictory policies that are being pursued on the front of different sectors of the country will lead us nowhere. Even the policymakers do not know what they want to achieve. They seem to be more focused on wanting to complete their tenure even if it means moving ahead without any clear direction for the economy.
Worst of all is that the doling out of resources continues unabated. The latest example is the approval of three basic pays to employees of the federal government, which alone will cause losses worth billions to the national exchequer. It is sad that the decision which will further deplete the national kitty was taken with one stroke of a pen in a few seconds. This pay bonus is only discriminatory because it will not provide benefit to contract employees and retired pensioners. The decision seems to have only been taken to lure voters in the next elections. The decision needs to be struck down by the judiciary by declaring it as part of pre-poll rigging.
One can also raise a question here as to why Finance Secretary Arif Ahmed Khan, who is principle accounting officer, preferred to keep mum on this matter. Why did he not muster up enough courage to refuse such a dole out? It has no justifications.
All this has been happening at a time when the ever increasing budget deficit is heading towards record breaking levels in absolute terms for the outgoing fiscal year. Literally, the rudderless ship has been left at the mercy of sea waves, having no internal controls of Q Block (Finance Ministry) over issuance of cheques from the national exchequer, mainly because of highly inexperienced high-ups posted at this critical place despite such critical times.
Those steering the wheel seem to have no clue of the repercussions this decision can have on the overall economic situation of Pakistan.
The overall budget deficit ballooned to Rs1,480 billion, equivalent to 4.3 percent of gross domestic product (GDP) in the first nine months (July-March) period of the outgoing fiscal, against 3.9 percent of GDP in the same period of the previous fiscal year.
Debt servicing has outpaced the defence and development expenditures as this one head has consumed Rs1,172.840 billion equivalent to 3.4 percent of the GDP during the nine months of the current fiscal year. The depreciation of rupee against US dollar has also pushed up debt servicing in the outgoing fiscal year.
The budget deficit had gone up to 5.8 percent of GDP in fiscal year 2016-17 when it stood at 3.9 percent in the first nine months of the previous fiscal year. Now, only a miracle can restrict the budget deficit below 6 percent of the GDP for the outgoing fiscal year, as it had already touched 4.3 percent during the July-March period of the current financial year 2017-18.
Keeping in view trends prevailing on the budgetary side, the budget deficit will be crossing the 6 percent mark in the outgoing fiscal year. Moreover, if the provinces did not generate the required revenue surplus by June 30, 2018 to the tune of one percent of GDP, then the budget deficit may touch even 7 percent of GDP for the outgoing fiscal year 2017-18.
In the wake of yawning budget deficit, pressure on external side of the economy increases as well because it increases demands of imports. So, if the budget deficit crosses the 6 percent mark, the chances of approaching the IMF will increase further as there will be more pressure on demand side of the economy. Talking to this scribe, one top official at the Ministry of Finance conceded that they were not adhering to any fiscal framework to bring discipline, and the principle of signing every incoming cheque was the order of the day. So, no one could really guess where this yawning budget deficit would stand by the end of the current fiscal year.
This unbridled expenditure will result in increasing the budget deficit, which is known as the mother of all economic ills. It will also have a multiplier effect on the country’s struggling economy.
When the budget deficit touches 6 to 7 percent of GDP despite keeping certain expenditures outside the official books, the financing of the deficit becomes the first headache for the country’s economic managers as it requires loans from both domestic and external avenues.
Pakistan’s economy is struggling because there are flaws in the overall economic policies being pursued at the moment. On one side, there is an expansionary fiscal policy, slowing the higher budget deficit, while on the other hand the central bank has raised the discount rate by 50 basis points in a bid to curtail demands.
With these contradictory policies, nothing will be achieved because policy makers are giving confused signals to the market and the overall economy.
Secondly, the increased budget deficit will further push up demands and hence put pressures on imports and current account deficit. There is co-relationship between rising budget deficit and current account deficit. So, controlling one without bringing down the other will be simply an impossible equation to work on.
With such a mammoth spike in the twin deficits - including the budget deficit and the current account deficit - there will be no other option but to go back to the IMF within a few months. Pakistan is increasing its reliance on Chinese loans, and even though it can help the country achieve safe deposits of up to $2 billion, which may provide breathing space during the era of the caretaker setup, when the new government comes into power they will have to swallow this bitter pill and fix the structural problems.
As matter of principle the IMF can kick-start consultation with the caretaker government to set the stage for a new programme. However, any decision or even holding of any structured dialogue in shape of Article IV consultation, which is basically policy level talk, must not be held during the caretaker setup. It is because such consultations fall in the domain of an elected regime, which can not only take a decision but also possesses the mandate of undertaking tough structural reforms.
Therefore, it will be better for overall governance and the economy of the country that such matters are left to be dealt with the government that takes up the reins after the upcoming general elections.
The economic difficulties have touched such a peak where window dressing will not resolve our long lasting structural problems. There is need to put the patient in the intensive care unit and then come up with medium to long-term prescription to avoid the trap after pause of every few years. Otherwise this boom-bust cycle on economic front will continue to persist for our coming generations.
The writer is a staff member
