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Financial tsunami

Political tsunami, as popularised by Imran Khan, is now well-known in Pakistan. What is not known is ‘financial tsunami’, which has struck Pakistani shores in the last two weeks. This tsunami will continue to inundate the financial shores till March 16. The after-effects of every tsunami have always been devastating. What will be the after effects of financial tsunami? How can the caretaker regime minimise the devastation? How will the post-election government address them?

As I noted in my article ‘Financial hara-kiri’ (March 5), fiscal indiscipline has been the hallmark of this government. Never in the history of this country has the nation seen such a fiscally irresponsible government. Persistence of large fiscal deficit reaching as high as 8.5 percent last year has more than doubled the country’s public debt. Such irresponsible behaviour has totally devastated the economy, the impact of which will continue to haunt the hapless millions in the years to come.

What is the financial tsunami doing then? How is it different from financial hara-kari? The answer is that it is the difference in speed at which both events can affect the economy. While it took almost five years for financial hara-kari to destroy a relatively sound economy, it will take less than two weeks for a financial tsunami to cause similar destruction.

In the last few days of its tenure, the present regime has undertaken highly contentious policy decisions including controversial approvals, financial sanctions, allocations, appointments, etc, which will have far-reaching adverse impact on the economy in general and country’s finances in particular. Let me summarise a few for illustrative purposes.

First, the abolition of the condition of having a National Tax Number (NTN) to purchase a new car is a bad decision. This is contrary to the rhetoric of broadening the tax base. This will encourage the growth of undocumented economy and breed further corruption. Second, the approval of inland freights subsidy for exporting sugar is tantamount to buying dollars at more than the official exchange rate. Third, providing electricity to big agricultural landlords at a flat rate will cost billions to the national exchequer.

Fourth, the Rs100 billion PIA bailout package based on a fictitious business plan is nothing but a financial tsunami. In my 11 year stint at the Ministry of Finance, I have seen many bailout packages given to rotten PSEs based on their so-called business plans. They never worked and will not work. In the meantime, the national exchequer will continue to bleed.

Fifth, dealer margin of the oil marketing companies has been increased to benefit them. Sixth, in a discriminatory manner the salaries of the employees of the Accountant General Pakistan Revenues (AGPR) and federal secretariat have been increased. Other government departments, their attached bodies and provincial governments will come under pressure to do the same for which no provisions were made in the budget 2012-13.

Seventh, massive release of funds from the so-called development programmes to ‘win’ votes is in full swing. The Planning Commission and its deputy chairman are fully supporting the loot and plunder. It will be difficult to gauge the extent of damage that these decisions will cause to the budget. Perhaps the true picture will not be known until several months after the exit of the tsunami.

While analysing the budget 2012-13 in greater depth, I predicted that the year would see a budget deficit in the range of 8.0-8.5 percent of GDP. The recent developments including the financial tsunami are expected to defy even my cautious assessment. There are indications that budget deficit in the current fiscal year may reach a level not seen before in Pakistan with severe macroeconomic consequences for the economy.

What should the caretaker government do to minimise the devastation of a financial tsunami? First and foremost, the country will need a neutral and technically competent caretaker government. Second, the finance minister of the caretaker government must be a technically sound person with a full understanding of the country’s finances. Third, all the decisions taken since February 26, 2013 must be reviewed carefully and approval given on merit. The controversial decisions and appointments must be frozen forthwith.

Fourth, the minister of finance must take stock of the country’s finances and share his assessment with the people of Pakistan. Fifth, the minister will need to take corrective measures by freezing unnecessary expenditure to minimise the damage in 60 days. Sixth, after taking stock of the country’s finances, the finance minister must prepare the country’s budget 2013-14.

This is important because the new government will have little time to prepare the budget for the next year. The finance minister must share the structure of the budget with the leaders of the key political parties. The idea is to take them on board while preparing the budget. Whosoever will form the government after the election will have an idea about the structure of the budget and will need little time to finalise it.

The newly elected government will inherit many problems. They will need a competent economic team to face the challenges. Difficult decisions will have to be taken in the first few months of the tenure. The political leadership must realise that business as usual will not work. This is an extraordinary situation, which will require extraordinary decisions.

I hope that the newly elected government will be cognisant of the challenges and will come up to the expectations of the people of Pakistan. It is clear that there is no room for fiscal profligacy. Maintaining fiscal discipline will be crucial to the success of the new government. Only one question remains now. Will the new political leadership rise to the occasion and pull Pakistan from the brink of economic disaster?

The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk

Dr. Ashfaque H. Khan, "Financial tsunami," The News. 2013-03-13.