Living off the future
(This is the SECOND in the series leading upto the FEDERAL BUDGET).
In his keynote address at the Pre-Budget seminar at Lahore Dr Akmal Hossain, eminent economist and member of the PM’s Economic Consultative Committee, touched on four sets of issues with respect to Balance of Payments (BoP), these being whether (1) we have done well or badly over the past year (2) long-term trends (3) policy package prescription of the IMF and (4) looking to the future.
Over the past year the statistics show that there has been a moderate increase in exports along with a marginal decrease of imports, net result being that our BoP deficit in 1988-89 was US$ 2,610 million while in 1989-90 it has come down to US$ 2,355 million. At the same time workers remittances has shown an increase from US$ 1,897 million to US$ 1,950 million though partly this has been due to payment of accumulated insurances, social security etc by Saudi Arabia. Cumulatively current account balance has improved, reducing from US$ 1,959 million to US$ 1,593 million. In nett terms our foreign exchange reserves have improved from 3.3 weeks of import expenditure to a capability of 5.5 weeks of import expenditure. In relative terms, the performance has been good, good enough to give confidence to the Consortium for more aid, in real terms, for long-term strategy evaluation, the performance has not been good enough. In 1980-81 the deficit in the current balance account was US$ 1,037, it has risen almost 34% in the last decade. Our capability to earn foreign exchange through exports is badly balanced, 61% of earnings coming through agricultural products, 28% through agriculture related earnings and only the balance 11% from the basket of so-called non-traditional exports. Since the price index of agriculture products in international markets since 1980 to 1989 has declined by 8.4%, there has been thus a nett decline in terms of trade because of excessive reliance on primary exports. Agreeing with Dr Akmal’s diagnosis, this can be traced over the last decade to (1) absence of necessary incentives (2) failure to diversify into manufactured goods (3) failure to capitalise on windfall foreign exchange earnings/remittances, on the contrary increasing expenditures on consumer durables (4) being stuck with the wrong level of exports and lastly (5) colonial mentality of accepting whatever IMF lays down as policy guidelines. One feels that our government functionaries could have been more independent in their thinking, refusing to accept without question whatever was the underlying IMF logic, the consensus agreed with Dr Akmal Hossain that this is a sad commentary on the policy of an independent country.
One cannot lay more than a part of the blame at the doorstep of IMF, after all IMF is meant to take short term measures only to ameliorate the immediate financial problem of any country. Mr Camdesus, President IMF, is on record on emphasising the short-term mandate of the IMF, concerned with only what he has termed as “battlefield surgery”. The IMF comes across as not overly concerned with sustainable development, in fact that is essentially not their mandate. While the analogy of acting under combat conditions is appropriate description about IMF objectives, that the patient may also be suffering from economic shell shock and needing sustained care is beyond the accepted IMF parameters. In Pakistan’s case, the IMF conditionalities which have been accepted by Pakistan in late 1988 for a three year credit infusion (extended for a year) included (1) reducing budget deficit from 8.6% of GDP to less than 7% of GDP (2) reducing money supply in real terms and (3) depreciation of the Pakistan Rupee against the US dollar. To do this there has been a cost, (1) reduction in development expenditure (2) naturally GDP growth rate has declined from a high 7% to 5.1% in 1989 and 5.3% in 1990. This has resulted in no space to manoeuvre as (3) our socio-economic infrastructure has deteriorated commensurately and (4) an unemployment crisis. Dr Akmal Hossain eroded his credibility somewhat by repeating the general government optimism at the figures, saying that he felt that the government had succeeded in controlling inflation, the consumer price being kept under control by government intervention through the Utility Stores. It is felt that he was not being objective as the price intervention only worked in the geographical vicinity of the intervention mechanism, the Utility Stores. Dr Akmal should have looked beyond his own wife’s purchases, the poor and the middle class are really hurting with spiralling inflation.
One agrees with Dr Akmal Hossain that the IMF prescription should not be taken as gospel truth as it leads to across the board control on credit and overly depreciation of the Pakistan Rupee, higher budget deficits and unemployment. However one feels that we are overly concerned with the IMF whereas we should have been more concerned with alleviating the Balance of Payments problem on the prevention-is-better-than-cure philosophy, which should include (1) increasing our exports (2) diversifying our exports (a) product-wise (b) targeting objectives nation-wise (3) using the IMF credit wisely and lastly (4) listening to the IMF when it says that Provincial taxes must be increased. In fact the last point is extremely important as the Provincial effort in raising taxes is abominable. The Provincial Budget’s last Budget year came to Rs 53.5 billion approximately, the Provinces raised about Rs 9 billion (about 16%) in revenues, the rest Rs 44.5 billion (84%) being met by the Federal Government through share of Federal receipts, subsidies and grants.
For some very earthly reasons, the Federal bureaucrats want to keep the Sword of Damocles in the form of Income Tax in their hand while the logical and correct method is that with devolution of powers there has to be commensurate decentralisation of tax assessment and collection. Acting on the incentive principle, the Federal Government must provide matching funds i.e. if Sindh collects Rs 5 billion in taxes, it must be given similar amount by the Federal Government for development. The Income Tax Department is not only mostly corrupt but also not cost effective, centralisation has accentuated the problems. Out of the Rs 16 billion proposed to be collected during 1989-90 approximately Rs 12.5 billion, mostly 80% comes from Multi-National (MNCs) and Federal State Enterprises, requiring less than 3% of the I T Department effort. The rest 97% of the I T effort is designed to extract tax (about Rs 3.5 billion) from 500,000 salaried and 500,000 self-employed, an exercise that, with honourable exceptions, lines pockets of Income Tax personnel down the line. This is an amazingly inordinate allocation of resources for the tax assessment/collection effort. While keeping the Corporate sector pertaining to MNCs and Federal State Enterprises under Federal Control, the Federal Government must divest itself of all other income tax assessment collection effort except that which falls within Federal or Federal Administered Territory. Let the Provinces be responsible for Wealth Tax while imposing Community Taxes to raise funds for its development and non-development expenditure, the matching funds that the Federal Government gives will be for development purposes only, in this manner the electorate at the bottom rung of the ladder will be inherently associated with the spending of tax money paid for both development and non-development needs. The present deficit is about Rs 66 billion in money terms, unless the Provinces get into the tax collection effort, this deficit will grow. By encouraging the Provinces to impose Community and Wealth Tax, the Federal Government will be passing on the responsibility to the Provincial Governments, at the same time those who are now out of the ambit of Federal taxes, the agriculturists, will fall within the purview of Community and Wealth Taxes imposed by the Provinces and executed by the Local Councils at the lowest rung, than up the ladder of the Sub-Division, District and Division levels.
Looking at the adverse Balance of Payments, our export policy with regards to non-agriculture and agriculture related products is not realistic. Pakistan can only export machinery and related items to the Third World (other than Buy-Back items on Offset Mechanism) and that also mostly in the adjoining region. Countries like Bangladesh, Sri Lanka, Burma, Nepal, Iran etc are our natural markets, provided we pay some attention to them. In this respect we need a full time Commerce Minister, not one with divided attention. Without casting any aspersion on Faisal Saleh Hayat, he already has his work cut out for himself as Minister for Local Government and Rural Development, particularly administering the conceptually brilliant but politically problematical People’s Programme. Some organisational changes are necessary, prime among them that there should be one Federal Minister for Finance and Economic Affairs, Commerce, Planning & Development, with Ministers of State in Finance and Economic Affairs, in Commerce and in Planning & Development. Insurance should be put under Minister of Finance and Economic Affairs. The creation of an Economic Czar has now become a dire necessity of Pakistan’s continued economic life. Unless the aforementioned Ministries are coordinated by one single person on a “war” basis, our Balance of Payments position is going to go from worse to abominable. While Countertrade is a necessary fact of life in the face of growing protectionism, strict control should be maintained to ensure that our goods and commodities do not face a price decline by competing with each other in the international market. Faisal Saleh Hayat has managed US$ 50 million increase in our cotton derivatives quota with the US, mainly because of the status and prestige of Ms Benazir with the US Administration and Congress, we should aim for a US$ 500 – US$ 1 billion increase. We do not want alms, just the means to finance our purchases through sales of our manufactured cotton cloth and made-ups.
Now that debt servicing has become the single largest component of our Budget, it is time we thought of the future of our children and begin to control this widening gap between our resource mobilisation and our expenditure needs.
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