On June 12 2013, Mr Ishaq Dar stood before the National Assembly to present his first budget as Finance Minister for the PML-N’s third tenure in government. The first part of his speech was taken up with a denouncement of the economic managers of the last government. The next part consisted of a delineation of the economic vision of his government. Nobody would expect the fulfilment of that vision in a year, but lets just see how far the PML-N has progressed in pursuit of its economic dreams for Pakistan.
The first goal was to build an economy which was “not dependent on others except through trade and investment.” According to Mr Dar, economic sovereignty demanded a refusal to live on “handouts and foreign goodwill.” In fact, the government went into negotiations with the IMF even before taking oath of office, and by the time these lofty words had been spoken in parliament, the broad framework of a program under the Extended Fund Facility had already been discussed. By September 2013, three months after the budget speech, Pakistan was a recipient of a $6 billion loan granted by the Fund. There is no denying that this was unavoidable given the balance of payments crisis that the country was facing by the beginning of 2013. What is harder to explain is the $1.5 billion that came in from Saudi Arabia in March 2014, which is apparently (according to the Finance Minister) not a loan, nor an untied grant, nor an oil payment facility, but a “gift” to fund certain infrastructure projects. The extent of the confusion on the purpose and nature of the “gift” is such that, according to a recent newspaper report (see Express Tribune of May 23), it is recorded as a statistical discrepancy in budget documents. If that doesn’t qualify as a “handout” and evidence of “foreign goodwill,” one doesn’t know what does.
[quote]Not a single tax exemption has been withdrawn in the last fiscal year[/quote]
The second goal was that a well regulated private sector would bear “the largest burden of economic functions.” This was no surprise given the PML-N’s history and inclinations, and the prevalence of the neo-liberal economic paradigm all over the world, including Pakistan. However, the gold standard for measuring business friendliness, the World Bank’s Doing Business report, showed that Pakistan’s ranking had slipped in the 2014 edition, which placed the country at 110th in a ranking of 189 countries, as compared to 107th in the previous year. This is odd in a country run by a party of businessmen. But perhaps not so odd given that the report estimates the ease of doing business for small and medium enterprises, who are essentially fighting for life in an atmosphere of high energy costs, poor transport and logistics infrastructure, a poorly trained workforce, unreliable supply chains and most of all, the undue concessions given to large businesses with clout. A level playing field it is not, and in spite of Mr Dar’s good intentions on regulation, it doesn’t look like the small businessman or the consumer in Pakistan is going to benefit from any regulatory reform in the short to medium term.
A currency dealer counts US dollars at his shop in Karachi
Goal 3 was to radically upgrade the fast depleting physical infrastructure of the country, beginning with the power sector. Little progress has been made on this front, given that increases in power tariffs don’t really count as reform.
[quote]It is not a level playing field for small businesses [/quote]
The fourth goal was that the culture of concessions and exemptions must end. This is where the government has utterly failed. Not a single tax exemption has been withdrawn in the last fiscal year. The FBR’s nascent attempts to identify tax evaders have been effectively nipped in the bud. The IMF’s demands to curb the SRO culture have been acknowledged, and lip service paid to the same. But little has changed, and a modified form of the so-called license raj remains in place, with big businessmen able to successfully lobby for concessions and policy changes.
Goal 5 was for the government to limit expenditure so as to stay broadly within the resource envelope generated through taxes. While nobody expects the fiscal deficit to disappear in the short to medium term, the need to at least control current expenditure was imperative. Ideally, tax revenue should cover at least current expenditure, with development expenditure being funded with non-tax revenue and foreign assistance, if at all. In actual fact, development expenditure has been slashed in the ongoing fiscal year, current expenditure and taxes are unlikely to meet the target of about Rs 2.5 trillion. Current expenditure in the last fiscal year was close to Rs 3 trillion, and it is unlikely to have decreased by much in the current fiscal. The government will probably show a cut in the fiscal deficit, but that comes at the cost of public investment in development schemes, and not through curbs on wasteful non-salary current expenses.
Carpenters at a workshop pause during a power outage in Karachi
Mr Dar’s last goal was to protect the weak and poor segments of society. The government has done this by effectively strangling BISP for the first six months of its tenure, even finding excuses for not paying the salaries of the department’s employees, let alone making cash transfers under the program. Transfers have now resumed, but that is less because of the regime’s good intentions and more because of the intense pressure of the donors backing the largest social protection scheme in Pakistan. Granted that BISP needs to be properly audited and regulated, but the answer to bad management is not closure.
[quote]The exchange rate strengthening by Saudi donation is of doubtful value[/quote]
The PML-N has relied on one-off measures to boost its reputation for economic management. The bandwidth auction has been a boon for the telecom sector, and a decent revenue generator for the government. There is some movement on privatization of loss making state owned enterprises, and while more could have been done, the regime should be commended for at least indicating which way it intends to go. On the other hand, the government has also trumpeted measures the ultimate gains from which are dubious. The exchange rate strengthening was managed and assisted by the Saudi donation, and other than the cosmetics, is of doubtful value. Exporters are already protesting that the rupee is seriously over-valued, but the Finance Minister seems to think it’s a personal triumph to keep the rate below Rs 100 to a dollar. The Eurobond issue was much heralded as a triumphant return to international capital markets, but the interest on the bonds, which is higher than that on Greek bonds, reflects Pakistan’s poor credit rating.
In its first year in power the PML-N has avoided tough measures and focused on short term measures which have, in some cases, yielded improved macroeconomic indicators. But it cannot govern like this for five years. At some stage, the unpopular decisions will have to be taken. Lets hope the next budget is an indicator of this.
