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Dar’s legacy

If one were to guess the education and experience of the architect of the budget for fiscal year 2017-18 then without prejudice – prejudice defined as being aware of Ishaq Dar’s credentials – one would have concluded it is the work of an accountant. And just one look at the numbers contained in the budget documents would make that apparent.

Be that as it may, budgeted projections for the current fiscal year are premature at best, not because Dar himself never bothered to adhere to any of the numbers in the budget, but because past precedence indicates that in an election year expenditure would be much higher than budgeted – and certainly higher than what has been the norm during the past four years of PML-Ns two administrations – first the Sharif and then the Abbasi administration. In Dar’s case projected revenue has been consistently considerably overstated, to challenge the officials of the Federal Board Revenue or so claimed Dar, however it challenged the people of this country given that he passed mini budgets in all the four years that he was operationally in-charge of the Finance portfolio. This over and above his using dedicated funds like the Gas Infrastructure Development Cess and Natural Gas Development Surcharge placed under non-tax revenue as other taxes.

Yet another obviously unbelievable number in the current year’s budget is the envisaged decline in current expenditure – negative 3.6 percent – from the revised estimates of last year; or from 3,904.7 billion rupees in revised estimates of 2016-17 to 3,763.7 billion rupees in the current year. More than saving of 141 billion rupees is attributed to a decline in the general public service expenditure – from the revised estimates of last year’s 2,741 billion rupees to 2.553.6 billion rupees in the current year or 188 billion rupees. This decline, in turn, is attributed in the budget documents to a reduction in foreign loans repayment (of 221 billion rupees) – an amount which is not credible for two reasons. First, because the reliance on foreign commercial banking sector (at high rates and low amortization period) is likely to increase from the 4 billion dollars procured during 2016-17 subsequent to the end of the three year International Monetary Fund programme in September 2016 when budget support loans from international development financial institutions (DFIs) ceased as, reportedly, the trust deficit that Pakistan, without rigid Fund monitoring, would remain on the narrow path to IMF dictated reforms widened; this year around one billion dollars was budgeted from this expensive source and already one billion dollars has been borrowed thus raising the possibility of much higher borrowing from the foreign commercial banking sector by the end of the current year; and, second, the Finance Division in a press release announced that 2.5 billion dollar Eurobonds/sukuk have been be issued – 1.5 billion dollar Eurobonds at 6.87 percent (with the rate at 8.5 percent for ten years and 7.5 percent for five year bonds issued in 2014, and 8.25 percent for ten years issued in 2015) and one billion dollar sukuk at 5.62 percent (one billion dollar issued in 2014 at 6.75 percent for five years, one billion dollar issued in 2016 at 5.5 percent). The Eurobond has been issued at the lowest rate during the incumbent PML-N government while sukuk is not. Be that as it may, the government had budgeted only one billion dollars under this head in the current year and hence borrowing from this source is in excess by 1.5 billion dollars and this too in the first five months of the current year with more projected unless some economies are implemented that do not appear to be under consideration.

Those who claim that had Dar remained in the country the budget estimates would have been adhered to need reminding that during the past four years Dar announced a mini-budget and began relying increasingly on borrowing from the foreign commercial banking sector from September 2016 onwards.

Budget documents indicate that in 2011-12 total external loans (all data revised) were 180.5 billion rupees while in 2016-17 the total was 971.6 billion rupees or a 438 percent rise, while grants declined from 2011-12’s total of 45.6 billion rupees to 24.65 billion rupees in 2016-17 or a decline of 46 percent. And, in 2011-12, total external interest and repayment of long-term loans was 980 billion rupees in 2016-17 the comparable figure is 1867.9 billion rupees – or a rise of 90 percent.

The other disturbing feature of the budget document is Dar’s manipulation to understate the budget deficit by overstating the provincial surplus. In the budget for 2012-13 the provincial surplus was estimated at 80 billion rupees and by 2017-18, an election year whereby the provinces are going to be extremely resistant to generating a surplus, Dar budgeted a surplus of 347.3 billion rupees, an untenable rise of 334 percent in just four years. For Dar to persistently argue that the 18th Amendment and the National Finance Commission award were skewed in favour of the provinces and required a revisit, though constitutionally disallowed, is baffling as the PML-N was a major player in the passage of the amendment as well as the NFC award. Those who are in the know state that even Punjab government has unambiguously indicated that the target set for the surplus is simply unattainable given that it is an election year however Dar’s priority was to balance the books, an accountant’s focus rather than that of an economist.

The question that many ask is how come the focus was on accounts as opposed to fundamental economic policy reforms/shifts during the three years that Pakistan was on an IMF programme (September 2013-2016)? It is unfortunate that Dar and the Mission leader agreed on absolute numbers, for example, how much to raise the revenue, without going into the fact that existing taxpayers were being taxed more with obvious negative implications on the steady erosion of the real value of each rupee earned, or to set a time bound structural condition to lower the overvalued rupee to minimize the negative impact on exports or to reduce the focus on an ever lower budget deficit and instead balance the target with an outlay that would have promoted growth (instead of relying on data manipulation) or indeed to desist from relying so heavily on debt enhancing as a means to shore up the foreign exchange reserves.

The list of economic transgressions by Dar, tacitly supported by the IMF mission leader, is exhaustive and one would hope that there is a complete revisit of the policies and in the short-term. Unfortunately, the Abbasi administration appears to be focused on signing LNG deals and borrowing more – be it through the commercial banking sector or issuing bonds or the domestic banking sector.

Anjum Ibrahim, "Dar’s legacy," Business Recorder. 2017-12-04.
Keywords: Economics , Dar's credentials , Board Revenue , Service expenditure , Current year , Policy reforms , DFI , IMF , LNG , PMLN , 2017-18