Debt, energy shortages: situation cries for greater political will

The budget makers led by Finance Minister Dr Abdul Hafeez Sheikh have returned from the Washington yatra after holding talks with the International Monetary Fund and the World Bank, as well as holding bilateral discussions with major donor countries such as the US, the UK and Saudi Arabia.
It should be, by now, crystal clear that all the aid-givers have been found on the same page, ie, get the good housekeeping seal from the Fund before any aid commitments can be honoured, albeit reluctantly or half-heartedly. The Fund, on its part, is found to be greatly appreciative of the efforts being made to rein in the fiscal deficit in the aftermath of the August 2010 floods. However, there is no significant dividend payout for additional taxation through the Presidential Ordinance. Instead, the Pakistan team has been told that the outcome of future balance of payment support is heavily dependent on how much is the fiscal deficit by June 30, 2011.
And, what will be the macroeconomic picture in the next financial year and the game-plan, duly approved by the parliament, to successfully bring the fiscal deficit down to 5.3 percent. The bottom line is that Pakistan can have a bit of comfort from "the bank of sovereigns" but no more disbursement of funds by them unless the steps needed to make structural changes take concrete shape, ie beyond verbal promises.
The country's economic managers are therefore caught between a rock and a hard place because they are in a position where they have to choose between unpleasant alternatives, and their choice might cause them problems; they will not be able to satisfy everyone. While the country is caught in a low growth business cycle there is no option but to borrow to keep the government operating. Therefore, the sole option to choose from is whether Islamabad should borrow domestically or externally.
Out of a total of Rs 10.4 trillion debt, around Rs 5.6 trillion is domestic while Rs 4.6 trillion is in foreign currency. The primary balance in the budget is negative, ie resources (tax and non-tax) are less than the non-development expenditure. Around Rs 950 billion out of the expected Rs 1,533 billion in tax revenue will go towards debt servicing, ie, principal and interest. It should, therefore, be obvious that the working of the Debt Management Office in the Ministry of Finance needs to be strengthened and accorded a fair degree of autonomy. The country has a Fiscal Debt Limitation Act and Parliamentary approval is needed to cross the threshold of consolidated debt-to-GDP ratio. The Federal Secretary Finance certifies to the National Assembly every year along with the Finance Bill that the law is not being violated.
This methodology, however, has not worked satisfactorily. The Debt Management Office should be directly answerable to the Parliament and must have the freedom to chalk-out a debt management strategy vigorously and strictly aligned with market conditions - with full powers to switch between domestic and foreign borrowings and between maturities as conditions change with an objective to raise the maturity profile from present 28 months towards 60 months in a realistic timeframe.
We are now in the budget season. While the taxpayers are looking for tax breaks - the government is looking for revenue enhancement to lower the fiscal deficit. The taxpayers want the government to cut expenditure and reduce wastages. According to officials, debt servicing and defence leave, very little behind to slash. They do, however, concede that the revenues can be enhanced if everyone agrees to pay and legal obstacles towards taxing agri-income are removed while services sector is successfully persuaded to pay its due share in accordance with its share in economy.
To achieve this, the political forces need to evolve consensus among themselves and then legislate at the provincial and federal levels. In a way, the bureaucrats are right and political forces need to fully address the issue of vertical and horizontal equity in taxation. However, the Federal Board of Revenue still needs to explain its profound failure to raise revenue, at least by the same margin as the nominal growth, ie, rise in GDP plus inflation.
Both the political leadership and the budget-makers need to understand that no plan or target will ever be achieved unless we address the energy-deficit situation head-on. Successive governments' so-called strategy to put Pakistan on a sustainable path to development is no more than a wish-list of projects and intentions instead of a comprehensive strategy. Successive governments have gone headlong in building distribution infrastructure indebting public sector utilities, allowing massive theft, not investing in upgrading and expanding economical electricity production capacity. As a result, Pakistan's total energy needs met through domestic sources have fallen from 72 to 38 percent.
An integrated development plan combining energy imports along with development of indigenous resources with a more diversified energy mix and programmes emphasising greater energy efficiency and better management is available, which cries out for greater political will towards its implementation.
If the PPP government decides to go into an "election mode" and does not bite the bullet quickly in bridging the price disparity gap between domestically produced natural gas and imported furnace fuel oil, as well as between motor gasoline and CNG, along with imported and domestically produced LPG, we are afraid the country's economy will go into a meltdown with riots on the streets. The present policy to shut down power generation due to the price disparity pointed out above will surely give birth to chaos and an acute sense of despondency. Should we be ready to experience the proverbial writing on the wall?