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A shambolic budget

The budget was passed with a majority vote this Thursday which, given the PML (N) strength in parliament as well as the constitutional amendment stipulating that a national assembly member would stand disqualified if he/she votes against his/her party on the finance bill, comes as no surprise. The combined three major opposition parties’ strength was under 100 seats in a house of 342 and it remained distracted to boot.

The MQM was understandably more focused on killings of its supporters in Karachi as well as the treason case filed by the government against Musharraf by demanding ehtesab of all military adventurers from 1956 which, some analysts maintain, had the objective of muddying the waters; the PPP was angered at the government revelation that the previous government wrote two letters to Swiss authorities namely on 5th November on court orders and November 22 without court orders, which according to some lawyers was in contravention of the court orders. The Tehreek-e-Insaf party stated that it was not a poor or middle income earners budget but that of the rich without making any impact on Finance Minister Ishaq Dar.

Dar simply ignored everyone and continued to insist that his budget 2013-14 was the best possible under the inherited economic circumstances and acknowledged the need to seek another loan from International Monetary Fund (IMF) to meet the agreed 7.6 billion dollars 2008 Stand-By Arrangement (SBA) repayment schedule. He added that he would negotiate the terms with IMF that would be in Pakistan’s interests implying thereby that Tarin, the then Finance Minister, had failed to do so; but in the event that he is unable to convince the IMF Dar said he would go to Plan B, and did not bother to elaborate Plan B.

The key question is whether Dar’s logic is flawed or whether his arguments have merit? The argument that borrowing to pay back past due interest/principal at the conditions dictated by the borrowing country is simply flawed logic. The reason: as indebtedness rises to unsustainable levels, and it would rise if new loans are incurred to pay past loans, foreign assistance (loans and grants) would be subject to the government embarking on donor identified reforms including implementing of challenging austerity measures. One has only to look at Greece, Italy and Spain to determine the veracity of this argument. Dar’s austerity measures are, unfortunately, cosmetic at best (though they are appreciated by the public as they constitute a reduction in the expenses of the prime minister and federal ministers) while his budgeted revenue targets are reportedly challenged by a Post Project Monitoring IMF mission to Pakistan. Be that as it may, Dar of course correctly argues that the unprecedented rise in borrowing was inherited by his government and default on a loan would make Pakistan a pariah in world capital markets. True, and considering that Pakistan debt to Gross Domestic Product (GDP) ratio is hovering around 61.3 percent (only 1.3 percentage points higher than the debt the Fiscal Responsibility Act allows), therefore the situation is not as dire as in Eurozone countries where debt to GDP ratio is well over a 100 percent.

What exactly is Dar’s solution other than his misplaced bravado in his numerous addresses to the parliament as well as the media? In his budget speech Dar stated “we will be inducting professional managers in debt management and taking advantage of numerous opportunities to diversify our debts both domestic and international.” And added a rather disturbing note with respect to the appallingly poor performance of the past five years: “elimination of borrowings from the State Bank will be pursued vigorously.

However, I am at pain to point out that the SBP ACT 1956, which was amended by this parliament in 2012 imposing two important constraints on the government borrowings from State Bank, which is basically printing money, has been consistently violated by the government. First, government could borrow from SBP only for a maximum of 3 months, and at the end of each quarter those borrowings will have to be retired. Second the then existing stock of debt from the State Bank, some 1400 billion rupees, was to be retired in a period of 8 years. Rather than any retirement this stock of debt now stands at 2300 billion rupees. We are now faced with this onerous responsibility to retire the debt in 6 years at the rate of nearly 400 billion rupees annually.”

Four points need to be made with respect to Dar’s extremely disturbing statement. First the servicing on domestic debt should have escalated by 400 billion rupees in this year’s budget, however, according to the budget documents, servicing/repayment of principal of domestic debt is targeted to rise from 2012-13’s revised estimates of 952.7 billion rupees to only 1064.5 billion rupees. But at the same time Dar has budgeted domestic permanent debt stock of 292.5 billion rupees – up from just 87 billion rupees as per revised estimates of 2012-13.

This must raise serious Pakistani public and donor concerns as it would fuel inflation and crowd out private sector borrowing with its obvious negative impact on raising productivity though Dar’s budget does indicate that an amount of 455.7 billion rupees would be set aside for foreign loan retirement and servicing in contrast to 263.8 billion rupees in 2012-13, or in effect the repayment scheduled under the SBA would be met.

Secondly and equally disturbingly Dar is silent on the budgeted figure of borrowing from the SBP. Thirdly the implication that the former government did not have professionals in debt management department of the Ministry of Finance is ludicrous and the more relevant criticism may be the previous government’s refusal to heed the advice of these managers, a failing that Dar is equally guilty of.

And finally and most importantly Dar promised diversification of domestic and international debt. It is unclear what he intends. Would he desist from money printing, and instead, seek loans from the commercial sector which as noted above crowd out private sector borrowing and thereby compromise his own objective of private sector becoming the engine of growth? Is he delusional enough to think he can go to the international bond market given the state of the Pakistan economy as well as the recession-ridden global economy? Would he issue T-bills which he wants the general public to invest in, a public already reeling under his tax on savings (0.5 percent on all moveable assets) as well as a one percentage rise in sales tax effective 13 June, which has already fuelled inflation thereby shrinking the purchasing power of earned income? Answers are urgently required given lack of clarity in Dar’s budget speech and documents.

Be that as it may, Dar is correctly supporting the development of a secondary bond market which essentially comprises of a financial market where previously-issued stocks, bonds, options and futures are bought and sold. To implement this vision would require a highly liquid market but the offers must form a balance between an investor’s need to keep his/her investments available for an emergency, or short-term, while the capital user wants it for the long-term. It is relevant to point out that at this juncture of our economic history there are concerns domestically about investing long-term in the secondary market given the budgetary levy of 0.5 percent on moveable assets and the contractionary monetary policy whereby interest rates were cut by 50 basis points recently. Once again one component of the budget compromises an objective stated by the Finance Minister.

And international debt is not that easy to acquire Dar may learn given global recession and international concern amongst our major bilateral donors over the construction of the Iran-Pakistan gas pipeline deal, the government’s stance on drone strikes and our economic reform agenda that to date has been long on rhetoric (wish list) and short on time bound deliverables. Multilaterals are unlikely to support the budget 2013-14 until and unless they see more concrete proof of precisely how Dar will achieve his budgetary objectives.

The fact that the Post Project Monitoring IMF mission delayed its scheduled departure by a week indicates that the team was not satisfied with the data provided by Dar in his budget, and Dar has already reportedly sought IMF support of 4 to 5 billion dollars to meet the scheduled repayment under the SBA later this year, which would empower the Fund mission to insist on their conditions and challenge his budgeted revenue claims. It is extremely unfortunate that a recently-elected government has failed to speak with the people’s voice in its budget document or indeed heed the people’s concerns highlighted by the media and a few assembly members on the floor of the house during the budget debate and instead it is the IMF team that may speak on behalf of the people of Pakistan.

Next week three provincial budgets presented by three different parties namely Punjab, Sindh and Khyber Pakhtunkhwa will be compared.

Anjum Ibrahim, "A shambolic budget," Business recorder. 2013-07-01.
Keywords: Economics , Economic system , Economic policy , Economic growth , Political issues , Political leaders , Political process , Swiss authorities , Political parties , State Bank , Pakistan , IMF