The Economic Year in Review
A populist Government is always torn between two widely dissimilar choices, whether to go the popular route in avoiding the levying of taxes or to impose such taxation as may be necessary to offset necessary development. Ms Benazir’s Government chose the politically pragmatic route of avoiding taxes in fiscal 1989-90 and almost got away with it, one dare says that all conditions remaining equal, the Federal Government would not have had to resort to increasing fuel prices in the last quarter of the Budget year. The gamble did not come off, a combination of bad financial discipline, worsening world-wide economic situation, internal circumstances particularly strife affecting the port city of Karachi and the increasing threat perception from India because of the escalating situation inside Indian Held Kashmir (IHK) have combined to put all plans into an economic flat spin. The Government, therefore, resorted to a last gap fuel-hike but luckily for them the month of Ramzan timing coupled with the present apathy of the masses towards widespread protest, force multiplied by mass concern at the immediate Indian threat, has paid off.
Talking candidly to the newly formed Financial Writers Association on May 6 at Islamabad, Mr V A Jafarey said that there were no rapid solutions to the economic problems facing the country, no magic formula existed to replace the long haul towards economic emancipation, the recipe including drastic reduction in the large budgetary deficit and control over galloping inflation. Everyone knows that the budget deficit has led to severe inflation, heavy foreign and domestic indebtedness and thus a severe balance of payment crisis. As stated earlier the reason for the deficit can be traced back to the Government’s decision in June 1989 not to risk the wrath of the masses (a la Venezuela and Jordan) by imposing taxes, popular at that time, the chickens have now come home to roost. Mr V A Jafarey was right when he mentioned that the favourite prescription for reducing non-development expenditure will not work effectively in the face of greater public demand for public services and the imperatives dictated by external threat to our society. What he did not mention is that the rhetoric of a populist Government invariably leads to heightened aspirations.
The Government is left with one real alternative, to raise additional resources. While one way is to minimise tax evasion by reorganising the tax system and providing for effective measures against loan indiscipline among other economic misdemeanours, the Government will have to impose fresh taxes. If anyone thinks that the Defence Budget of Rs 52 billion or the debt servicing of Rs 59 billion, making a grand total of Rs 111 billion can be reduced, it is at best a pipe dream. This leaves only Rs 31 billion to be spent on 29 Government departments including the expenditure allocated for control of the internal law and order situation as well as outlays for subsidies. Of the Rs 31 billion, Rs 18 billion (58%) is in the form of salaries, it would be impossible for a Government committed to providing employment to reduce jobs in the present situation, so any cut in salaries expenditure is a non-starter, Mr V A Jafarey mentioned that the cut in the balance Rs 13 billion will be at best of symbolic value and he has invited suggestions to help the government formulate effective curtailing of expenditure. However, one may add that V A Jafarey did advocate that the many perks contributing to administrative over-expenditure like luxury cars, junkets, over-staffing etc must be curtailed, acting on the formula that you can expect the masses to gird their belts for sacrifice only if the government functionaries do not continue living off the fat of the land.
It is common knowledge that the major contributing factor to present inflation has been the widening budgetary deficit, requiring the government to impose indirect taxes through fuel-hikes, etc. The argument goes that while the rising prices of products do cause inflationary pressures, keeping the prices subsidised through bank borrowing would cause galloping inflation a la South and Latin America, hard choices have to be faced now. However, cutting the deficit does not mean that the country is cut of the economic woods, there is no substitute to increasing output, raising of investment levels and expanded social services.
Mr V A Jafarey has, however, been arguing that a sustainable budget deficit is a necessary condition for a stable economy in which investment and output can flourish leading to solid economic progress. For the sake of everyone and his uncle, there should be a national consensus on what the word “sustainable” amounts to.
In a welcome change to past practice, the Federal Government through its energetic Secretary of Information. Mr Shahjahan S Karim has initiated a dialogue in the media through pre-budget seminars in the Federal Capital and the four Provincial capitals. This is a significant change, if it had commenced a few weeks earlier it might have evoked enough advice for the Government to formulate in drawing up its Annual Budget. Mr Jafarey has insisted that the Budget is still being actually processed. As it is, the seminars have been a refreshing exercise and as this article goes into print we would have been through four stages of the Seminars those that have been held at Islamabad, Peshawar, Lahore and Quetta (being held today).
Mr AGN Kazi, always credible with a plethora of figures, touched upon the Macro-Economic Development of Pakistan over the past year in the first of the series held in Islamabad on May 8. As Mr AGN Kazi is wont to be, his honest and forthright views were well-received even by a generally hostile media. According to the figures distributed in the seminar, despite adverse conditions all economic indicators seemed to be generally favourable. A steady growth rate of 5.2% reflects generally increased overall expansion all around. The general internal situation may be corroding steady economic progress but crops and livestock products showed steady increase despite the bad floods in the Punjab. In industrial production except for 20% decrease in MS Billets production and 10.5% in H and C Rolled sheets, marginal increase in fertiliser (0.5%), and Soda ash (0.6%) and caustic soda (2.8%), there have been major increases registered in the manufacture of trucks and buses (20.3%), airconditioners (12%) and cotton cloth (12.5%), registering an overall upward movement thereby raising the targeted increase for 1989-90 from 7% to 7.7% in large scale manufacturing. Overall the GDP for commodities decreased from 6% to 5.5%. The sub-total for Services sector was revised from 5.6% to 4.8% but on the other hand Fixed Investment which was targeted at 16% of GDP for 1989-90 has been revised upward to 16.5%. National Saving declined from 14.3% of GDP to 14.1% but compared to 1988-89 where it was 12.7% of GDP it has still shown a favourable rise. The Domestic Saving increased from 10.3% of GDP to 11.5% though short of the targeted percentage of GDP at 12.6%.
One major flaw with these figures is that they are all based on projections supplied by a Government department not known for having much of a reputation, deserved or undeserved, for reliability. It was suggested to Mr AGN Kazi, seemingly well received by him, to bring in the private sector, on experimental basis, to verify figures independently. Projections for inflation were at a high of 11.2% in Jan-Feb 1989 and a low of 5.1% in Nov 1989, with end financial year between 7-8%. In the face of galloping inflation in consumer goods and food items, this low figure of inflation is least understandable to the middle class and the poor. Mr AGN Kazi allowed that given the pressure on domestic budget reason dictates that housewives should be brought into the process to authenticate government figures, after all the housewives see the prices of bread, onions, chillies, eggs, etc change to their detriment, apparently adding to the rising cost of living. Whatever may be stated about controlling inflation, it seems excessive deflators are being applied in different financial sub-sectors to “create” favourable statistics.
The long and short of it is that our growth rate is not good enough to keep up with the rise in our population, Pakistan having overtaken Bangladesh in this department. At 3% plus rise in numbers every year, our population will double in the next 20 years, our growth is barely marginal to stay abreast. This growth rate has been achieved over the past decade at great cost to the existing social infrastructure. Roads, telephone lines, water and sewerage, electricity, hospitals, educational facilities etc are in advanced stage of neglect or non-existent. The selfish penchant of some of our so-called whiz kids has been to impress IMF and the World Bank in their individual capacities for jobs for themselves.
The inadequate social infrastructure can be rectified only at great cost. To remain popular successive government’s have resorted to large-scale deficit financing, our penchant to resort to bank borrowing and external aid has now become a severe addiction, there is no doubt that the cycle of debt has to be limited and contained, may be even reversed. To do that there has to be additional taxation but here is where the PPP Government of Ms Benazir must be exceedingly selective, the cut and thrust of the sword of indirect taxation is mostly borne by the middle class and the poor, it is time the rich took their share of the burden.
The need of the hour is not only to impose direct taxation but to ensure that the revenues are collected.
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