I had the opportunity to attend the joint sitting of parliament addressed by President Asif Ali Zardari. And was witness to Dr Abdul Hafeez Sheikh leading the desk thumping on all points economic raised by the President.
Dr Sheikh's critics may be tempted to aver that this was tantamount to applauding his own performance which brings to mind a well known saying by the well-known English dramatist and a personal favourite George Bernard Shaw: My specialty is being right when other people are wrong. A fellow Britisher, Bertrand Russell, expressed a somewhat different view: the fundamental cause of trouble in the world is that the stupid are cocksure while the intelligent are full of doubt.
Doubtless Dr Sheikh in his own defence would argue that he above all others in the Cabinet (and outside including those who have witnessed a steady and dramatic erosion of each rupee they earned sitting in darkened homes shivering in the winters without gas and suffering from heatstroke during load shedding in the summers) who challenge his assertions that the economy is improving are wrong and he alone is right. Dr Sheikh may also apply Russell's quote of the 'stupid who are cocksure' to the growing number of his detractors. However, the President's claims with respect to his government's accomplishments in the economic field during the past four years, beyond questions based on information provided by the Minister of Finance, provides an opportunity to once again evaluate the government's claims and determine their veracity.
The government, the President said in his speech inherited a range of economic issues, a credible claim, and itemized how his government effectively tackled these very same issues in four years, with Dr Sheikh was at the helm of economic affairs for two of those years.
There is no doubt that the PPP-led government inherited an unsustainable budget deficit of 7.6 percent which compelled it to go on the International Monetary Fund (IMF) programme in the last quarter of 2008. As a consequence of complying with IMF conditions the deficit came down to 5.2 percent in 2008-09. By 2009-10 the deficit rose to 6.3 percent. However remittances showed an impressive improvement due to Pakistan Remittance Initiative launched by the government focused on encouraging the use of formal rather than the informal channels as well as the historically low interest rates in the West. Dr Sheikh was appointed as Finance Minister on 10 March 2010 subsequent to the resignation of Shaukat Tarin who ostensibly cited personal reasons for the resignation whereas many maintain that the government's refusal to undertake policy reforms including austerity measures proposed by him, inclusive of reducing conspicuous consumption by members of the large cabinet, led to his voluntary resignation.
Subsequent to Dr Sheikh taking over the charge as the Finance Minister the country witnessed a rather blatant fudging of statistics, reminiscent of the Shaukat Aziz era of which Dr Sheikh was a part for three years, with the Chairman of the Federal Board of Revenue admitting publicly that he had overstated revenue collections by 99 billion rupees. An inquiry was launched after a public hue and cry and to date there is no evidence to suggest that anyone has been held accountable. This overstating of revenue allowed the four month old Finance Minister to claim a budget deficit of 5.7 percent for 2009-10 in the 2010-11 budget documents instead of the 6.3 percent which of course had negative repercussions on the next year's budget deficit target.
In this context, it is pertinent to note that Dr Sheikh in the current year's budget document maintained that the budget deficit would be 4 percent, an unrealistic claim for three reasons even at the time he delivered the budget speech: (i) programme loan support of 117.8 billion rupees that, as a former staffer of the World Bank he would know would not be forthcoming after the stalled IMF programme was cancelled due to his continued failure to implement the agreed reforms, (ii) tax revenue of 2 trillion rupees which given past failures to meet the budget's tax revenue targets appears over optimistic, and (iii) failure to contain the current expenditure whose escalation during Dr Sheikh's tenure has been greater than the slash on development expenditure. The SBP in its second quarterly report revised the deficit to 4.7 percent. This figure too is unachievable given the enhanced support to white elephants like Pakistan Railways and sources within the Ministry of Finance maintain that the deficit figure would be closer to 7 percent - close to what this government inherited.
Second the government inherited a balance of payment crisis with a current account deficit of 8.4 percent: In 2007-08, the current account balance was negative 13.9 billion rupees which has declined due to improved performance of remittance inflows. In 2007-08 remittance income was 6.5 billion rupees while it has surged since then. Exports were 20 billion rupees in 2007-08 and surpassed this figure due to the rise in per unit price of our major export items in foreign markets, while output has continued to decline in this country due to continued massive load shedding. Thus external factors have helped our balance of payment position significantly and the President's claim that external shocks due to global recession have negatively impacted on our economy presents a picture and fails to take account of the benefits.
Third, the President stated that the fiscal space provided by rescheduling over 12 billion dollars loans in 2002 was lost. Reference to 2002 may well highlight Dr Sheikh's association with Musharraf's regime in the public's mind which benefited from 9/11 but failed to translate the cash inflow into sustained development; yet this reflects poorly on the present government as it highlights the government's failures in terms of capitalizing on the democracy dividend, a pet subject of the President during his first three years in power, and focuses attention on the massive rise in government debt - domestic debt which is fuelling inflation. Never has Pakistan's indebtedness increased so dramatically in its history that it did in the past four years alone: from 5980 billion rupees in 2008 to a rise of 1162 billion rupees during the first nine months of 2010-11 alone.
Fourth, the president claimed that "we have mobilized domestic tax revenues to lessen our dependence on others and to give better services and projects to our people." Two facts easily challenge this assertion. First the tax to GDP ratio has worsened during Dr Sheikh's tenure - from over 9 percent to less than 8.5 percent (a ratio that determines how much of our economy is fuelled by tax income). The disturbing answer is little and less than the average of South Asia. Effectively the President's statement that tax revenues have doubled since 2008 reflects collections under the one-off inequitable taxes associated with the flood surcharge levy on the income tax payable by the salaried class.
Fifth, the President noted that over four years, the government spent 2.2 trillion rupees on development. To arrive at this figure Dr Sheikh added federal as well as provincial PSDPs and other development expenditures (inclusive of the Benazir Income Programmes). However, he ignored the fact that in 2010-11, the first full year that he was the Finance Minister, percentage outlay on development with respect to total federal expenditure disturbingly declined from 24 percent in the previous two years to only 19.8 percent. Additionally each year, the budgetary allocation for PSDP was mercilessly slashed indicating that while allocations in the budget were cited as a reflection of the government's commitment at the start of the year, by the end it was slashed due to failure to stem the rise in non-development expenditure. The 2011-12 budget estimates for development claim that nearly 30 percent of total expenditure would be spent on development however officials of the Ministry of Finance on condition of anonymity declare this as nothing but a pipedream.
Other development expenditure includes a flagship programmes in terms of support for the vulnerable (example BISP and employees' stock option). Data suggests that the President's claims can be easily challenged as he was not provided the right figures which reveal a sharp decline - 50 percent - in assistance to the vulnerable while the number of beneficiaries of government supported programmes declined by a whopping 43 percent.
The President also noted in his speech that salaries of government employees increased by more than 125 percent. One would be tempted not to lay the responsibility for this increase on Dr Sheikh as even a freshman economic student would know not to raise salaries at a time when (i) productivity is declining, (ii) current expenditure is rising and development expenditure massively slashed to bring the deficit down, (iii) tax to GDP ratio declining, (iv) increasing domestic borrowing (external sources drying up), and (iv) failing to implement power sector reforms. However, as the Finance Minister he must take the blame for this obviously flawed policy decision.
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Year Federal Provincial Other Total Total federal Total
PSDP PSDP develop and dev as
exp provincial % of
expenditure total exp
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2008-09 308 150 43.9 501.9 2087 24
2009-10 294 216 118 628 2585 24
2010-11 196 266 45.5 507.5 2559 19.8
2011-12 300 430 97 827 2767 29.8
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(Budget wish list)
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Pakistan T&C Sector 2008-09 India T&G Sector 2008-09
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Contribution to Exports US$ 9.57 bln. (54%) US$ 20.98 bln. (13%)
Contribution to Manufacturing 46% 14%
Contribution to Employment 18.65 mln. (58%) 35 mln. (9%?)
Contribution to GDP 8.5% 4%
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