Jun 172008

By S. Akbar Zaidi

IF the economy is in as bad a shape as the two finance ministers since March this year have suggested, then the budget presented in parliament last week, fails to address issues to turn the economy around. In fact, by not addressing pressing problems at this juncture, the government is digging yet another grave to find itself buried in, within a very short space of time.
This lost opportunity to move forward on the economy is symptomatic of the way this government has been functioning, a fact displayed in the two other critical areas — with regard to the president and the judiciary — where it has been unable to act and to forge ahead. Its failure to act clearly and forcefully on the economic front, in a timely manner will, in all probability, only add to causes which will result in its own undoing.

Moreover, in a broader political-economy framework, one can add to this line of argument, the fact that the inability of the government to use the annual budget in order to deal with what the last finance minister kept referring to as the economy’s ‘meltdown’, only underscores the point made by many observers that this government will be unable to govern and to move forward, unless it deals with the two most pressing problems facing it. As long as the issues of the president and the judiciary hover over the head of the government and its allies, governance will be ineffective and weak. Hence, economic revival will also not be possible.

Of course, the present government is in no way responsible for the numerous problems that afflict Pakistan’s economy, yet the fact that it is in power, assumes that it must take responsibility if it fails to address these problems. While we celebrate the return of the democratisation process, albeit one which continues to be partial and interrupted, we also have expectations from the government that it must fulfil its responsibilities.

The main economic indicators show that a deteriorating trend has been in process for some months now. The GDP growth rate expected to be 5.8 per cent, is still considerably higher than the average for the 1988-2003 period, but is lower than the trend seen over the last five years. While perhaps this slowing down in the growth rate was to be expected given adverse international commodity prices and on account of the fact that the previous growth was built on weak foundations, expectations suggest that growth is going to be lower for some years to come. With a growing fiscal deficit at present around seven percent of GDP, the highest in over a decade, and a current account deficit worsening as oil prices rise, all estimates for GDP growth seem to be optimistic. While these three key indicators need to be addressed soon by the government, what is particularly important from the point of view of a democratic and popular government is to be able to address the single most important issue which affects all citizens, namely inflation.

With inflation at around 11 per cent, the highest in the last three decades, any government would have had a major task dealing with causes which are not in its control. The rise in food and oil prices globally are the main reasons why inflation is so high, although a number of poor decisions and an equal number of indecisions by the Shaukat Aziz government and the caretaker government, have made things far worse. Moreover, the economic policies of the previous government are responsible for creating an artificial bubble which has resulted in a substantial deterioration in income distribution.

The finance ministry must realise the scale of the issues it has to confront and has to quickly deal with if it is to make its mark on the economic front and stop the economy from deteriorating further. However, the budget does not show any substantial sign of an attempt to turn around the economy, and although a couple of measures have been taken, they are insignificant to deal with the nature and scale of the problems. The imposition of import duty on luxury items was long overdue, and the attempt to provide an income support programme for the poor, is welcome. Development expenditure has also been raised, as is standard practice, and one can only hope that better and effective targeted provision of all government expenditures take place. What is troubling, however, are a number of measures announced in the budget, and many that are conspicuous by their absence.

The cut in subsidies might help marginally lower the fiscal deficit, but will probably result in higher prices for oil, power, fertilisers and food items for consumers, especially the poor. Similarly, an increase in the proportion of indirect taxes will also have a disproportionately higher incidence on lower income earners. Neither of these two measures will help the poor and will further challenge their ability to survive under worsening economic conditions mostly related to rising inflation.

With a tax-to-GDP ratio of a mere 10 per cent and with a fiscal deficit of around seven per cent of GDP, one would have expected the government to be considerably more imaginative on the revenue generation front. It is unforgivable that the government has allowed the exorbitant profits from the stock market to go untaxed for another two years. There is no reason why profits from speculation should be untaxed under stable and normal circumstances, and under conditions where the economy is facing serious crises, such generosity is criminal.

The government should have gone out of its way to give inflation and food shortages its highest priority. It should have had a short-term, immediate, focus which would have meant compromising on other issues at the moment, and a medium and longer term economic agenda. One would have expected that the Peoples Party election manifesto, launched with much fanfare, would have had more substantive issues addressed with regard to the economy, some of which would have found expression in its first budget.

The disappointment one has with regard to last week’s budget is just another indication of the democratically elected government’s failures to act on a number of critical issues. In fact, one can argue, that only after a new president is elected and the old judiciary is back, will other issues be addressed. For one thing, the main coalition partner — PML-N — will be back to participate in government and the problem regarding political uncertainty resolved. Perhaps only once these ‘political distractions’ are dealt with, will we get better and effective economic management.

Source: Daily Dawn, 17/6/2008

 Posted by at 2:07 pm

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