FEDERAL BUDGET 2008-09: A PRE-BUDGET RUNDOWN
Can the forthcoming budget address
the challenges facing the economy?
The impact of inflation is not confined only to the poor but it has wide repercussions for the economy as a whole. It has exorbitantly increased the public debt, created uncertainty for the investor and eroded the competitiveness of exports.  It has made difficult the task of maintaining exchange rate stability and distorted the targets of monetary aggregates.
By Dr Mushtaq Ahmad

The economy has persistently been on a downslide for the last couple of years, and the monetary and fiscal measures taken so far have desperately failed to arrest this trend. Despite a democratic government in place after the 18th February election, the political uncertainty which has intensified with the 9th March judicial crisis has not come to an end. The coalition government led by PPP, has to give by virtue of its traditions and election commitments to the public, a poor friendly budget without leaving the terrifying macroeconomic profile to continue unattended.

Until a couple of years back the economy showed some what reasonable growth in domestic output but due to continued inequitable income distribution, this growth has failed to make any significant improvement in the overall prosperity, and poverty incidence continued to rise. In the wake of 9/ 11 the law and order remained in jeopardy and some parts of the country remained in a state of civil war resulting in a colossal loss of precious human lives. The growth trend which started deteriorating three years back has been projected by the State Bank to suffer further this year. This is principally due to a slow down in industrial sector and poor performance of agriculture. The irrigation dams’ capacity is under a continued stress and its neglect despite the recognition of the problem has left agriculture highly prone to any catastrophe in not far distant future. The industry has not achieved the needed comparative productivity level to stand the international competition.

The trade deficit is widening with a speed to leave behind each preceding year. The current account deficit has vaulted to touch $11.6 billion mark in the first ten months of the current year which is as high as the forex reserves. Due to poor domestic commodity production, the exports are being fast outpaced by the imports. The budget deficit is increasing and is estimated to surpass the target despite the recent pruning of PSDP. The finance minister is reported to have quoted it as high as 9.5 per cent of GDP which is an all time high.

The worst aspect of the weakening economy is a high inflation, growing at an alarming pace. It has stemmed from food shortage and cost push factors like high energy prices. The hardest hit is the poor. Sensitive price indicator which measures the price trend of 53 essential commodities mostly consumed by the poor has shown an increase of around 27 per cent this May. With no aggressively effective policy apparently in place to check this trend, the inflation rate is most likely to set a new record. The staple food, wheat, has gone out of the reach of the middle class common man, leave alone the poor. Sad to say this has nothing to do with the economic policy management but is all due to poor administration, miserably failing to check smuggling.

The impact of inflation is not confined only to the poor but it has wide repercussions for the economy as a whole. It has exorbitantly increased the public debt, created uncertainty for the investor and eroded the competitiveness of exports. It has made difficult the task of maintaining the exchange rate stability and distorted the targets of monetary aggregates. Recently this has compelled the central bank to further tighten the monetary policy by raising the bank discount rate, CRR for some deposits and stringent measures. This is agitated by the business community on the ground that the economy, already in a sort of recessionary situation, hardly justifies this. Short supply of wheat coupled with rising energy prices are the prime causes of the current inflation, it is to see how a tight monetary policy with an aim of sucking the effective aggregate demand could help. In our case this policy has neither worked in the past nor would it work this time but it would certainly depress the aggregate supply. High interest policy works well in maintaining exchange rate stability in those countries where it attracts foreign investment but in our case this card has never worked due to a number of reasons. At the most it is an effort to correct an imbalance between monetary and real assets, caused by the inflation. In my view it will perpetuate the inflationary spiral.

Budget takes major load of macroeconomic management and gives a lead to the monetary and trade policy. It sets the aggregate economic targets and stipulates the social and administrative goals. The coming budget is being made in rarely unique circumstances. The political scene is turbulent. The present government got a short time to perceive and comprehend fully the existing economic situation and to interact with the representatives of different walks of life. With one coalition partner not fully on board, the situation is all the more precarious. The country has negotiated some important loan agreements and committed to meet some conditionalities set by the donors and the international agencies like IMF and World Bank. During this short spell of time the political high ups have not had sufficient interactions with them.

The government is faced with a dilemma. It can not run away simply saying that the current situation is the legacy of the past as the tradition goes. It has to take measures to correct the fundamental imbalances like high inflation, alarming unemployment, food deficit, huge budgetary gap, bop imbalance, energy crisis besides attending to basic issues like law and order. Then there is a big list, not to be ignored, of public expectations and aspirations from the political government. The leading coalition partners have remained out of power for quite some time and now they can not afford to disappoint their constituencies. For example, there is an old commitment by the PPP of ‘roti, kapra aur makan (bread, clothing and shelter) and now it has to justify its claim of being pro-poor.

Leaving aside the policy conflicts in resolving the issues, the real problem is inadequate resources. The resource gap is already hovering around a high level and the revenue collections so far realised are indicative of a fall in proportion to the nominal GDP. There are limited prospects of doing miracles in tapping new non-inflationary resource avenues next year. Politically it would not be a good omen to squeeze the common man by raising utility tariffs and taxes as they bear their burden invariably regardless their statutory incidence. There is also not much scope of cutting the budgetary expenditures. At least general inflation has to be adjusted in current expenditure. Purchasing power of the existing salaries and pensions has gravely deteriorated due to inflation, and this can not be left untouched by a democratic government. Earlier we have had a bitter experience of cutting PSDP in the 90s which slowed the growth pace and consequently that policy was deliberately abandoned. The finance minister has hinted to increase domestic borrowings through the national savings schemes but it will be having serious fallout for an anti inflationary monetary policy and borrowings by the private sector.

The politically popular schemes like yellow cab scheme, youth investment promotion scheme have never gone well with the donors and multinational agencies. During their recent visit to Pakistan the IMF and World Bank mission has emphasised on reduction in subsidies. Given the huge bop gap, the country has to continue its dependence on foreign loans at least in the medium term if not in the long run. The coming budget would certainly be a real test of the political art to resolve the dilemma of conflicting political and economic goals with the donors on board.

ODE TO THE BUDGET

A budget is something both evil and good,

But too complicated to be understood.

You need to be a sort of Einstein at least

To figure out whether the budget’s a monetary feast

Or yet another fiscal disaster in the making,

Raising the price of everything, and shaking

The last few good apples from the national tree,

Leaving only rotten fruit for the likes of you and me.

And yet we look forward to this annual exercise

Like kids in a candy store. Hardly anybody tries

To ask the budget-makers what they hope to achieve,

Or how many more taxes they have up their sleeve.

The day of the budget speech sees us clustered

Around our TV sets, some of us looking flustered,

Others looking as if they’re waiting for jam on their toast,

And a few looking as if they’re about to see a ghost.

When the finance minister begins his peroration,

He has the attention of virtually the whole nation.

People in towns and villages across the land

Are hanging on his every word. But few understand

What he means when he says macro imbalances have grown,

But current expenditure and PSDP spending have shown

A positive trend. To ordinary Pakistanis like you and me,

All this sounds like Greek or dialects spoken in Burundi.

Worried businessmen feverishly scribble cryptic notes

About the things being said. “What are currency floats?”

Someone asks. No reply is forthcoming. Why?

Well, because currency floats are like a pie in the sky.

Very few listeners are quite sure what the term means.

And even if some are, they don’t give a hill of beans.

They’ve heard it all before: the promises, the pledges,

The anti-inflationary jargon and oil-price hedges.

But forget currency floats; what we should be asking

Is who’s going to be sinking, and who’s going to be basking

In the Caribbean sun at some convivial hostelry,

Or on some island in the Aegean, where Homer’s wine-dark sea

Laps gently against the shore, echoing Circe’s song.

And there lounge budget-makers who don’t know right from wrong.

Which is not to say that Homer is on many people’s minds.

They’re more worried about the sales tax on Venetian blinds.

No university offers a course in deficit budget-making,

Just as no polytechnic offers a course in funereal undertaking.

We are left to our own devices to figure the budget out.

Should it be greeted with applause or with an angry shout?

Some of us say every budget leaves us worse off than before.

Budgets remind us of Oliver Twist, the boy who asked for more

A few, however, will be laughing all the way to the bank,

They’re the ones who’ve lined up jobs in some US think tank.

So hail to thee, dear budget in the making, hail to thee!

Thy gobbledygook is like an exercise in perverse serendipity.

We mere mortals will never know what may lie hidden where:

Concessions for a privileged few, for others taxes even on air.

Yet come budget-day, and we will be sitting glued

To the nearest TV set, waiting to hear if the soaring price of food

Is going down or going up and up and up and up.

That’s the ‘gup,’ my friends. That is always the ‘gup.’

– KALEEM OMAR