By Dr. Muhammad Yaqub
The PML-N government proclaimed, in the words of its finance minister in his first budget speech on June 12, 2013, that it “is inheriting a broken economy” requiring a “comprehensive agenda of reforms” for its turn around. In the same speech, he also made a “declaration of our intent to fulfil all promises that we made to the nation” during the election.
The PML-N promised to break the begging and borrowing bowl and achieve self-reliance, and improve rates of investment and growth and create employment opportunities. Assurances were given that a clean and lean government would be run, and the palatial prime minister house and similar other lavish official residencies would not be used – to save taxpayers’ money and set personal examples of austere living. It was promised loadshedding would be managed better, laws obeyed universally, accountability enforced vigorously and all key appointments made on strict merit to ensure good governance.
There was hope that with good governance public sector enterprises would be restructured and, if need be, privatised to eliminate their budgetary haemorrhage. Moreover, the taxation system was also to be reformed to make it more broad-based and development expenditure increased, with the rate of inflation being rolled back to reduce the economic miseries of the majority of the people.
The echo of the statement made by the finance minister in the National Assembly on June12, 2013, under thumbing applause of his party leaders, still vibrates in our ears. He declared that “we need to protect our economic sovereignty which would only be possible when we refuse to live on handouts and foreign goodwill. Self-reliance has to be our real goal”. But the first promise the government broke was about self-reliance. It engaged in begging and borrowing from all possible foreign sources and collected close to $10 billion in a year.
Instead of taking policy measures to reduce trade deficit under the promised ‘comprehensive agenda of reforms’, the government used foreign inflows, and sale of national assets to foreigners, to repay past debt, finance trade deficit, build up foreign exchange reserves and appreciate and stabilise the nominal exchange rate. Thus, contrary to its promise, it decided, like the previous government, to ‘finance’ the structural deficit in the balance of payments with foreign inflows rather than take politically difficult economic policy decisions to ‘reduce’ it.
As a result, export growth has been negligible in FY14, imports have risen faster, trade and current account deficits have widened, and foreign debt and debt serving liabilities have increased. The buildup of some reserves and stability in the nominal exchange rate have been achieved by using large foreign financing that is bound to haunt the country in the years to come.
The situation with the budget is no different. Instead of undertaking bold tax reforms to bring into the income-tax net absentee landlords, a large unincorporated business community, professional groups, the service sector, real estate dealers, stock market speculators, and operators in the underground economy, the government has found refuge in the use of the rupee counterpart of foreign inflows to finance the fiscal operations.
The lowering of budget deficit by foreign grants, privatisation proceeds and further cut in development expenditure, and a fall in domestic bank borrowing due to large foreign funding, have been paraded by the government as indicators of budgetary improvement. But in reality they represent the impact of foreign inflows and not any policy reforms.
The promise of tax reforms to improve the tax-to-GDP ratio, and austerity in expenditure to demonstrate to the people the government’s commitment to better governance, seem to have been forgotten. In particular, there has been flagrant violation of the finance minister’s commitment “not to put additional burdens on those who are already paying their due share of tax and to ensure that those who are not paying anything should be forced to contribute”. The landed aristocracy and operators of a large and growing underground economy pay no taxes at all under the very nose, if not patronage, of the government.
On the expenditure side, and contrary to the promises, there has been a fall in development expenditure at the federal level both in relation to the original budget target for FY14 and the GDP. The provincial governments have been forced to generate surplus in their budgets to offset the deficit in the federal government to meet the IMF conditionality. It has constrained the provincial governments from spending adequately on the neglected sectors of health, education, sanitation and clean water supply. The rates of saving, investment and economic growth have remained miserably low in the absence of policy reforms.
The rupee counterpart has also been used to meet current expenditure of the government including maintenance of palatial official residences of the president, the prime minister, the cabinet and the senior bureaucracy and purchase of bulletproof cars for the VIPs. Simple living and high thinking is not what the government is practicing and preaching. While ordinary people feel totally insecure even in their homes, our leaders drive around in bulletproof cars surrounded by convoys of police and paramilitary personnel, blocking the crowded city roads for travel by ordinary citizens. Notwithstanding promises to the contrary, loadshedding and circular debt have come back in full force.
To add fuel to the fire, a large chunk of the rupee counterpart of foreign inflows has been set aside by the federal government to finance prestige projects, including modern motorways and airports. Western-style motorways would be of benefit only to those who can afford to buy high-speed SUVs to drive them fast on those roads. Modern airports will provide comfort to only those who can purchase expensive airline tickets to fly to exotic places for recreation and merrymaking. These mega projects will neither promote economic growth nor alleviate poverty and will make no difference in the daily lives of the poor and lower middle class.
As regards institution building, the principles of good governance have been ignored while making appointments. Senior level appointments at the State Bank of Pakistan, as in other places, reflect cronyism and nepotism rather than merit. With a weak SBP management, and violating the relevant provisions of the SBP Act, the autonomy of the SBP has been trampled. It has enabled the government to use the SBP and commercial banks to finance fiscal operations through excessive money creation – to the detriment of the private sector and monetary stability. The consequence has been double digit inflation, which is a cruel form of taxation of the poor. It has also lead to misallocation of resources and retardation of growth and added to income disparity and absolute poverty.
In the banking sector, a pro-rich and anti-saving financial intermediation policy has been in place. The bulk of deposits in banks are of small savers who are getting negative real rate of return on their savings. The bulk of borrowing is done by the rich who pay no more than two to three percent rate of interest in real terms on their borrowings, not taking into account the cost of subsidised lending done in the name of investment and exports and loan write-offs for the rich and powerful. As a result, there is implicit transfer of resources from the poor to the rich through the banking system. It is similar in other areas of economic management, notwithstanding the government propaganda to the contrary.
We can summarise the existing state of economic governance and economic policies by borrowing words from the finance minister who used them to describe the poor performance of the PPP government. “From economic growth to prices, from revenue to expenditure, from public debt to circular debt, from monetary expansion to interest rates, from exchange rate to sustainability of balance of payments” there has not been much of an improvement under the watch of the PML-N government.
The writer is a former governor of the State Bank of Pakistan.
Email: doctoryaqub@hotmail.com
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