Futile appeasement

Compromising fiscal discipline in election-year budgets is not just harmful in the long run, it is also pointless in the short term

Futile appeasement


ost elected governments in Pakistan realise towards the end of their terms that they have failed to live up to the expectations of the electorate. An effort is them made to appease the voters through subsidy-laden budgets in their last year in power. The effort has always failed as is apparent from the fact that none has been re-elected in a general election.

Pakistan has been an elitist economy. National governments are perennially afraid of hurting the vested interests. This has led to a constant increase in inequality. The share of the poor and the vulnerable in the growth dividends is nominal. The richest segment of the society gets the lion’s share. The cost of living has increased significantly during the tenures of the past five governments even if the pace of this increase varied.

Come election year, all incumbents relax the rules for vested interests to win their support in the next election campaign. Thus, hoarding of essential commodities, for instance, goes unchecked and price control efforts remain subdued. Six months before the completion of a government’s tenure there is a flurry of postings and transfers made on the recommendations of the ruling party members. Efficiency of governance routines at all levels therefore drops.

Elected governments in other countries too are known to come up with special packages ahead of elections. Most of them plan it from the day they assume office. They build up reserves for four years and release the amounts during the election years to gain favour with the electorate. In our case, most governments struggle with fiscal deficits throughout their terms but still refuse to forgo the special election–year spending.

The Shaukat Aziz regime, brought in to replace a weak Jamali government, too, allowed export of surplus wheat before the harvest of the next crop. This created an acute shortage of wheat in the domestic market leading in extreme cases to food riots. To top it, influential supporters of the government were allowed to hoard the next crop and mint money. No wonder, the party (Pakistan Muslim League-Quaid) lost the election by a wide margin even though the government enjoyed support of a military dictator. A reasonable economic performance for most of the government’s term failed to pay back after the incumbents lowered the governance bar in the last year. The ruling party was thus relegated to the third position behind the Pakistan Peoples Party and the Pakistan Muslim League-Nawaz.

The PPP-led government that assumed power in 2008 faced the challenges of declining growth and foreign exchange reserves. Its woes multiplied when the crude oil prices touched historic highs of over $120 per barrel. To contain extreme poverty, the government started the Benazir Income Support Programme under which millions of poor families received cash support. The government also reinstated thousands of public sector companies employees that had been shown the door by the PML-N government in 1996-99 for having been recruited without regard to merit. These workers also received benefits and promotions from the date of termination. This cost the exchequer a fortune. The economy then went from bad to worse. In its election year budget, the government increased the monthly dole out to the BISP beneficiaries. The salaries of government servants were also increased regularly and had doubled by the end of its tenure. The support price for wheat increased 150 percent. Despite the popular measures the government lost the general election and was replaced by the PML-N.

The PML-N government got a breather when global commodity prices crashed in its first year. The oil import bill was drastically reduced. The government did not pass the full impact of the lower oil prices on to the consumers. Industrial production remained subdued. Exports declined during the first three years and increased slowly in the last two years. Still, the going was good till its prime minister was removed on court orders. The next prime minister struggled to get a grip on decision making and the economy started slipping. Still, a growth rate of above 5.5 percent was maintained in its last year. The ruling party was convinced that powers that be will not allow it to be re-elected. In its election-year budget, numerous concessions were granted to the taxpayers at all levels. The income tax rate for the salaried persons was cut to half. This widened the fiscal deficit. The populist measures did not prevent its ouster.

The Pakistan Tehreek-i-Insaf government that assumed power in August 2018 announced a supplementary budget to withdraw all tax concessions. It also raised the income tax rates for the salaried class. In terms of economic management, the government struggled and appeared rudderless until Hafeez Sheikh was appointed finance minister and accepted a harsh front-loaded IMF package to put the economy back on track. The measures he introduced appeared to be working but were diluted by the PTI leadership. Finally, he was removed and the economy went on a roller coaster ride requiring the injection of $3 billion every six months. The populist spending continued even though the fiscal deficit got out of hand. When the PTI government was removed the voter appeasement was further enhanced. The petrol and diesel oil prices for domestic consumers were slashed by Rs 10 per liter although the global crude oil rates were high and rising. At the same time the electric power charges for domestic consumers were reduced by Rs 5 per unit despite the ever increasing circular debt.

The “economic landmines” laid by the deposed PTI government are now haunting its successor. Public finances are in dire straits. Disproportionate populist spending has brought the country to the verge of economic collapse. The IMF refusal to bail out the economy could spell disaster.

The writer is a senior staff reporter at The News

Futile appeasement