It is indeed reassuring that the "government will keep following the path of fiscal discipline," says a press release of the Ministry of Finance at the conclusion of an Economic Advisory Council meeting on Saturday. The EAC convenor, Dr Hafeez Pasha, said the government has assured the council that elections will not constitute any threat to budgetary imperatives. And, that Federal Finance Minister Dr Hafeez Sheikh has committed that macroeconomic stability will have a clear precedence over everything else and the budget deficit will be reduced by 0.5 percent next year to 4.5 from 5 percent of GDP or Rs 1050 billion, excluding Rs 391 billion, in debt payments.
Pasha also said that Dr Sheikh has insisted that the government will make endeavours to keep the deficit at 4.7 percent of GDP for 2011-12. Sheikh's assurance that macroeconomic stability will be preserved, the economy is still fragile therefore gains achieved will not be reversed and that the Planning Commission's growth framework plan would be pursued to get the economy back on a higher growth trajectory is to be taken with a grain of salt as both his political boss President Zardari and his administrative boss Prime Minister Gilani in their public utterances are giving contrary assurances that the next budget will give good news with relief to the people.
Business Recorder fears that it may not be the Finance Bill 2012 through which the government will pursue a political strategy based on a calculated appeal to the interests or prejudices of ordinary people. Populist decisions outside the budget that the political leadership will force upon the economic team such as postpone timely rate increases in electricity tariff, POL products and natural gas as done between 2006 and 2008, by the Musharraf/Shaukat Aziz-led dispensation, will upset macroeconomic stability. As a result of the previous government's action or determined inaction, not only did the forex reserves deplete from $16 billion to less than $10 billion but it also led to unwarranted printing of currency notes resulting in inflation, shooting to over 25 percent in August 2008. Fear of losing votes created a mountain of circular debt that even after four years the government is unable to fully address.
In 2009, the government received parliamentary approval for an increase in the international oil price to be a passed-through and the electricity tariff to be raised by 32 percent to fully cover the past losses of distribution companies. Future operating losses incurred every quarter would be covered and Discos and Gencos restructured to reduce theft, line losses and other operational difficulties. Despite 14 and 18 percent tariff hikes, operating losses have not been fully covered and the finances of discos have not improved. Monthly increase in billing amount, due to a tariff hike, equals a shortfall in monthly bill collections. Consequently, the circular debt, despite a Rs 6 billion a month subsidy from the budget and two conversions of circular debt into government bonds, shows no sign of a reversal in trend.
What has been the result of all this? Domestic debt - broadly classified as permanent, floating and unfunded debt - now aggregates over Rs 7.1 trillion compounded at the rate of 12 percent per annum. The government's economic wizards aver that Pakistan is still better off than other highly indebted developed countries - with a 66 percent debt-to-GDP ratio compared to countries where the debt is over 100 or 200 percent of GDP. They, however, conveniently ignore the fact that the banking sector's global assets in those markets are 200 percent or more of their GDP; while in Pakistan, this sector is only 32 percent of GDP with total public debt at 66 percent of GDP. Escalating public debt does not bode well for macroeconomic stability and growth as it exerts an upward pressure on interest rates and crowds out domestic private investment. Moreover, the higher interest cost associated with domestic debt places a substantial strain on budgetary resources. Savings originate from the financial system and it is fallacious to weigh the debt as a percentage of GDP in isolation. The fact is that Pakistan's public debt is twice its resources. Over rupees one trillion that the government will borrow from the banking system in the last quarter of the current fiscal includes a roll-over of maturing debt, ie, principal plus interest with around 25 percent additionality. Our concern is that in an election year, the government will keep on postponing any increase in the price of energy and the circular debt size will keep on swelling instead of reducing. A fall in forex reserves and note printing may once again become the norm with very high inflation as a net result. We apprehend that announcements of new projects with award of contracts to influential people in the various constituencies to buy votes would be resorted to. So it is not the budget alone through which votes may be sought. Raising salaries and pensions to cover inflation and persisting with subsidies for fertiliser, wheat and power sector may come through the Finance Bill but delaying tariff hikes in case of rising international oil prices in the face of street protests may cause a serious setback to efforts aimed at creating macroeconomic stability and undermine the fragile economic recovery. The incumbent government has struggled to overcome the consequences of the previous government's politically-motivated economic decisions. Natural disasters such as massive floods, for two years in a row, have also not helped. But still we do need to learn lessons from our past follies. Sensible people do not keep repeating the same mistakes expecting different results.