Sep 232008

by Dr Meekal Aziz Ahmed
This is with regards to the government’s new economic stabilisation programme. It is difficult to make a definitive judgment of how good or bad it is because it conceals more than it reveals. Perhaps that is deliberate.

The government aims to cut the domestic and external deficit and bring down inflation. All very noble objectives. We should have done these 18 months ago so that we would be seeing the impact now when it is most needed. How they plan to cut the “twin” deficits, and how quickly this will happen, which is the crux of the issue, is not entirely clear. Given the typically long lags between taking a policy decision and seeing its results, what do we plan to do in the meantime with a foreign exchange reserve loss of about $500 million a week, inflation at 25 percent and a monetary policy that is hostage to an unravelling budget?There is some mention about cutting developing spending. I agree the public- sector development programme contains a great deal of fluff, which needs cutting and better prioritising. But we should be cutting current spending as well. Fewer foreign junkets by our government servants which have been talked about recently in the press will simply not do. Mr Zardari travelling by PIA will not do either, although I suppose it is better than luxuriating in the Qatar-donated VVIP Airbus A-310. Current spending cuts need to be deep, visible, meaningful and lasting.

We should also be cutting defence spending. In fact, that should be our starting point to show that we are being serious. It will also show to the people that our defence forces are sharing in the sacrifices we need to make. Instead, all we hear about is another squadron of ageing F-16s and new initiatives to develop the plutonium route to making more bombs.

On the fiscal side, subsidies are to be phased out. This is a bold step. These subsidies were untargeted and costly with their benefit accruing mostly to the rich. But once again, there is no mechanism through which we plan to protect the poor and vulnerable groups. Why we continue to ignore their plight is beyond comprehension. I suspect this is because they haven’t come out on the streets in open revolt. They have been devastated by inflation already. Removing subsidies, while necessary, with no provision of some sort of safety net to protect them from its harsh effects, could push millions of them into poverty, as inflation has already done. The Benazir Card programme, which could have helped, is nowhere in sight.

I am sure everyone believes that the subsidies have been removed because of the “Washington Diktat.” If our subsidies truly helped the poor, there would be no objection to keeping them. If the subsidies were “financed” with specific off-setting cuts in expenditures, they would be acceptable. But we want the subsidies and the spending too.

Revenue measures are given only a cursory mention. This means we will be stuck with the Federal Board of Revenue’s famous, unalterable, tax-to-GDP ratio of nine percent which is taking us nowhere. There is some mention of how well tax revenues are doing and much optimism because of it. With inflation at 25 percent, is this a surprise? Yet, given its less-than-sterling record, the FBR will either still collect just as much tax revenue as the “nominal” (output-plus-inflation) expansion of the economy, resulting in a constant tax to GDP ratio, or it will collect less than the nominal growth of the economy as it has done over the past decade and produce a decline in the tax-to-GDP ratio. The latter is the more likely outcome. This, despite the fact that many of the revenue measures, such as the new taxes and restraints on imports, yield quick revenue. They are easy to collect.

There is much rejoicing about exports increasing. When the rupee has plunged 20 percent, one hopes exports are growing in rupee terms. The real question is, have exports increased in physical, quantitative terms irrespective of which currency they are being measured in?

Although the fiscal deficit is to be cut, there is no mention of a specific, revised target for 2008-09. Clearly, the original target of around five percent of GDP contained in the budget is unachievable. At the very minimum, and, as a good rule of thumb, the deficit will be six percent of GDP. A revised fiscal deficit target, and how tight it is, along with the revised external current account deficit target, would have told us something about the credibility of the whole stabilisation package. Of course, behind the numbers, we need to see the policies. This issue appears to have been kept deliberately vague.

The external financial gap is to be filled with privatisation proceeds from oil and gas, and so on. This is also expected to shore up our foreign exchange reserves. It sounds as though privatising these entities can be done next week. Privatisation is a long and cumbersome process and the proceeds always uncertain in magnitude and timing. They should not be relied upon for financing the external deficit but treated as “exceptional” inflows.

It remains unclear how the stabilisation plan hopes to halt the haemorrhage of our foreign exchange reserves in the meantime, except through imposing still higher taxes on imports. Higher tax rates on imports beyond a certain point can have counter-productive effects. It is likely to divert imports into informal channels (smuggling), thereby diluting the impact of the tax measures on government revenues.

There is no programme conditionality. A stabilisation programme, to be successful, must have its own conditionality. Every policy measures must have a timeline and be in consonance with other complementary policy measures. Everybody, the Ministry of Finance, State Bank, the FBR, the Planning Commission, even the provincial governments, where appropriate, should know what has to done and when. No slippages should be tolerated and there should be a central monitoring unit dealing with programme implementation. That would be a positive change from the past. The absence of conditionality, of a timeline of self-discipline, is the biggest flaw in the government’s stabilisation programme. The IMF should not be the only one to impose conditionality. We should impose it on ourselves.

(To be concluded)



Source: The News, 23/9/2008


 Posted by at 10:05 am

Leave a Reply

en English
%d bloggers like this: