Budget Dynamics


When all the hyperbole and semantics of stabilization and growth are done, Pakistan’s many problems can be traced back to one basic issue, poor revenue collection. What would happen if all of a sudden Pakistanis decided to pay even 30% of what they are supposed to pay in taxes? To start with there would be no Budget deficit, what to talk about meeting the gap by begging for loans. Then, we would be able to pay back some of the hefty debt (and commensurate interest thereof) we have managed to acquire in a dozen or so “democratic” years, successive Finance Ministers running from pillar to post to acquire even more debt to pay for the servicing alone what to talk of returning the principal amounts due. We would then be able to allocate a substantial sum for upgrading/modernizing the socio-economic infra-structure which is falling apart fairly rapidly. Next, more money would be allocated for development expenditure, giving priority to those areas which are still living in the dark ages even in the new millennium. In a country where the main business of government is business instead of governance and the biggest employer at all levels is government, the increased cash flow into the economy will force-multiply the economic opportunities é that in turn, alongwith a myriad more pluses, would allow the government to decrease taxes and thus increase the revenue collection. This is the stuff dreams are made of, being an incurable optimist and with a genial nature that does not accept reverse as a permanent feature, Shaukat Aziz, Pakistan’s Finance Minister for the past two budgets, must be dreaming this recurring dream. And what would happen if the revenues doubled to 60%? Fantasy?

Regretfully, our revenue collection is a nightmare. And given the fact that Gen Pervez Musharraf is loyal to a fault where his friends are concerned, this recurring nightmare will not go away unless he bites the bullet and puts Riaz Naqvi Chairman Central Board of Revenue (CBR) and his band of merry men, out to pasture. The Finance Minister must immediately carry out wholesale, drastic changes. This country cannot be held hostage to personal relationships, CBR has failed this well-intentioned military regime, it is now time to use a scalpel judiciously. The only man who managed some change at CBR was late Moinuddin Khan, dead now of a broken heart, almost 40 days to the day today. Leaving a most lucrative job at a very critical point in his banking career, he fell for the promises Mian Nawaz Sharif was making to the nation. To his lasting detriment Moinuddin Khan found that Mian Sahib in practice seldom meant what he preached, beneath the political veneer he was a hostage to his own father. If the Sharif family ever wants to be a player again, they should keep Abbaji and Mian Sahib in permanent retirement and send Shahbaz Sharif back. At least Shahbaz did something for Punjab. On the other hand Shaukat services a master who means what he says, mostly, but is still reluctant to apply the scalpel to his friends, even when they fall for short in performance. One hopes that becoming the President may change him. Moreover Shaukat is not as intense as Moinuddin Khan, being almost Reagen-isque in his ability to shrug off criticism, smiling away problems that the normal human being would be devastated with. To deliver very difficult proposals in any Budget with good cheer, I would choose Shaukat Aziz anytime.

And what did Shaukat deliver? In the face of reduced GDP mainly because of the drought, of rising world petroleum prices and a recession of sorts, things very much out of his control, he managed to be positive. Reductions in agricultural output and a host of inadequacies / deficiencies brought to light by the Economic Survey 2000-2001 made all-in-all a very bleak economic picture, even then the Finance Minister came out with a brave effort, an investor friendly pragmatic-in-the-circumstances Federal Budget. One thing one must concede very honestly, there is no doubt that the stabilization measures have borne fruit, that Pakistan’s economy is not on the verge of collapsing as during the fag end of the “democratic years” of both political parties. That enough credibility is now in the statistics dished out by Pakistan for IMF and the World Bank to accept that the fudging thereof, rampant at one time, is at a halt, the hovering soul of Moeen Afzal haunting the corridors of the Ministry of Finance notwithstanding. We are tied to IMF/World Bank apron strings whether we like it or not, they have responded to our new-found financial credibility by giving us long-term low interest credit for badly needed structured financial adjustments. And you did not need to read Shaukat’s lips to hear what he said before, during and after the Budget, “no new taxes”, on the contrary there has been a rationalization of the taxes thereof. We had fuel price increases less than a week before the Budget presentation, which will invariably lead to electricity price increases, this in turn will lead to inflation, this will hit the common man. Zulfikar at WAPDA, honest to the core but quite obdurate otherwise, does not have one inventive bone in his body what to talk of balancing his expenditures without charging more for electricity than we can already ill afford. Another increase in electricity prices and a new round of inflation will set in but why should Zulfikar worry about the people of this country as long as WAPDA survives?.

There is the promise of much-needed relief for government employees but the measures have been delayed till December, this has taken the gloss of the package which supposedly takes into account real-life miseries of a salaried class that is forced into corruption because they lack the means to live honorably. Moreover some have been cosmetic changes, the absorbing of ad-hoc increases over the years means, in real-terms not much relief. The Finance Minister must re-consider his proposals and start the package in July. IMF/World Bank conditions call for drastic reduction of personnel in employment institutions and nationalized financial institutions. While one totally agrees that every unit of government and semi-government was bloated beyond measure, throwing people out of work during a period of near-recession is at a very huge social cost-and indeed an economic one also é something that no government can afford. To satisfy IMF conditionalities governments cannot turn their backs on social responsibilities. Golden hand shakes, besides making a hole in balance sheets, puts people on the street when jobs are not available. Besides social upheaval, the economic cash flow into the economy’s melting pot is slowed, this further deepens the economic slowdown. Given that privatization is necessary, it can’t be at the cost of anarchy as recent history of IMF in many countries records. The government is being brave in a no-win situation, it should have fought with the IMF/World Bank to keep basic human requirements paramount. Retrenchment is necessary but at this time is tailor-made for political and undesirable elements to take advantage of a fairly volatile situation, ripe for exploitation. Whatever, give the government credit for biting the bullet and taking unpopular decisions in the long-term national interest.

What is very significant is that the first but barely perceptible moves towards growth rather than stabilization have been made. This trend speaks volumes for the government’s firm intent to crawl its way out of this economic dark hole. One great milestone approaching is the re-scheduling of debts in September this year. The wholesale abstention of western countries, US and European Union States among them, from the oath-taking ceremony of the President is bad news, economic blackmail is likely to follow. Between now and September there has to be a thaw in the diplomatic freeze, particularly if Pervez Musharraf can convince the world that a return to democracy will certainly take place in Oct 2002 and rapprochement with India is an abiding principle of his foreign policy.

The bad news is that this year the “Nino” phenomenon may spell floods to follow drought, an ominous sign is that the monsoons have come early. That will be a double whammy where it hurts Pakistan most, the agriculture sector. The good news that the Finance Minister listens, this time the consultation with business and industry has not been for proforma purposes only, many of their suggestions have been adopted and augers well for the future, one can expect the government to be more inter-active with the entrepreneurs who risk their capital for profit, particularly in adverse economic circumstances.

Overall budget dynamics in the face of a horrendous economic environment has been very positive, give the Finance Minister an “A” for effort.

Mr. Ikram Sehgal is Publisher and Managing Editor of Defence Journal (Pakistan). He was Chairman APSAA for the year 2000, now acting in adhoc capacity pending elections for the year 2001.