Secretary Finance Waqar Masood while briefing the Senate Standing Committee on Finance maintained that the government was making all-out efforts to contain the budget deficit for the current fiscal year at 6 percent. This is 1.3 percentage points higher than the agreed deficit with the International Monetary Fund (IMF) under the stalled Stand-By Arrangement (SBA).
The reason for the escalation in the deficit is partly attributable to the floods and the costs associated with the rescue and relief activities undertaken by the government, inclusive of the Watan Cards. Masood, however, identified two other runaway expenditures that, he maintained, were largely responsible for the rise in deficit estimates for 2010-11. First, the subsidy to the power sector alone accounted for a hefty 301 billion rupees. The Secretary, however, revealed that in spite of this huge injection, the circular debt was still at the disturbing level of 145 billion rupees. If the government withdraws the recent rise in the price of oil and products, as demanded by all mainstream political parties, then the subsidy element in the budget would rise further and the deficit would, according to estimates, be 0.2 percentage points higher. The government also procured wheat in excess of domestic needs with some surplus destroyed during the 2010 floods/rains as storage space in godowns was not available and the rest has yet to be exported. Masood added that the second major reason for the rising deficit is security related expenditure.
There is general agreement that no government, be it PPP-led or by another party or indeed by a dictator, has the flexibility to adjust expenditures on either subsidies or security-related operations. But a government can and must reduce other expenditures. Notable amongst these is the heavy annual bailout packages, estimated at around 300 billion rupees per annum, on, at best, inefficiently run state-owned entities (SOEs) and, at worst, on corruption steeped management of SOEs routinely engaged in violation of public procurement rules. Considering that the present government has made senior appointments in most of the SOEs suffering massive losses, the blame rests with the government. The decision by the Prime Minister to raise the salaries of all government servants by 50 percent is unprecedented in a global context as well as in the context of this country.
To add insult to injury, the Prime Minister insists that the pay rise will not be deferred even though the government is relying heavily on borrowing from the State Bank, in violation of the SBA, thereby increasing the deficit, which is fuelling inflation. In other words, wage-push inflation is a concept that one would hope the Finance Minister would explain to the cabinet. State Bank Governor concurred during the briefing and stated that financing of the deficit through SBP is pushing up inflation. Another expenditure that requires a revisit is the amount spent on the very large cabinet as well as advisors. In other words, there is considerable scope to slash non-development expenditure.
Government detractors point to other equally valid factors that are contributing to a burgeoning budget deficit. These include the shortfall in revenue collections that are partly due to the failure of the government to deal with large-scale corruption in Federal Board of Revenue, (the former Finance Minister Tarin had mentioned a figure of over 500 billion rupees per annum); and partly due to sustaining a tax system that remains inequitable and anomalous - inequitable because the tax system exempts rich landlords as well as those Pakistanis who bank their moveable and immovable assets abroad, from payment of income tax and anomalous because the public and private sectors engaged in the same productive activity are required to pay tax at different rates. Additionally, ever-rising reliance on taxes that are levied in the value-added mode, namely sales tax and excise duty, are not generating higher revenue for the government given the recession in the economies of our major buyers and the fact that domestic industry is operating at much less than capacity due to the severe ongoing energy shortage.
Both the Governor SBP and the Secretary Finance referred to reliance on foreign assistance as a prerequisite to improving the performance of key macroeconomic indicators. While Masood lamented the low inflow of foreign assistance, with the IMF programme stalled, bilaterals are not converting their pledges into disbursement, and the Governor SBP admitted that in spite of increased remittances and exports, the financing position without the release of the second last tranche of the SBA could become an area of concern. This reflects an obvious fact: the country's economic managers continue to deal with a financial crisis situation nearly three years after the present government took over power. There is an urgent need to revisit its strategy inclusive of expenditure as well as revenue generation, which is obviously not working. It is unfortunate that even though the government has taken some very unpopular but necessary decisions, yet it has done so by inflicting pain on the shrinking middle class, a group compelled to increasingly join the ranks of lower income groups.