Unabated public spending
The price of oil and food subsidies were there as it is, adding up to the steep rise in expenditure, broadening the gap between income and public spending and letting the current account deficit cross all barriers.
High placed sources in the finance ministry in Islamabad told Dawn that the spending graph of the government moved vertically upward post November 2007.
In its first quarterly report, the SBP says, “All key fiscal performance indicators deteriorated significantly in Q1-FY08. As a percentage of GDP, both, the fiscal and primary deficit increased, and more importantly, the revenue balance moved from surplus in the first quarter of the preceding four years to a deficit in Q1-FY08”.
The central bank asserts that low revenue collection was not the cause but it was the unabated spending by the government that lead to fiscal imbalance posing a grave challenge to the future economic prospects of an economy already teetering because of a prolonged period of political uncertainty and law and order situation. “The latter (deficit) was despite an impressive growth of 22.3 per cent YoY in total revenues during Q1-FY08”.
The bank reminded, “The revenue deficit is particularly troubling, as the Fiscal Responsibility and Debt Limitation Act binds the government to keep its revenue balance at least zero from FY08 onwards”.
Perhaps, the hard remarks of the central bank on the bad fiscal performance pressurised the government to respond in haste. Trapped in a situation of its own making, for a better part, the interim set-up did what it could: pretend to be making corrections when it was beyond its control and scope.
Still it opted to transgress its limits and mandate by announcing to cap the development funding for the new development projects to control on public spending. Which are the projects that have yet to start eight months into the current financial year? Or how much the government would save by not funding the development projects it promised at the start of the year was not projected in the announcement made last week.
By displaying its inherent tendency to pose as a regular government entitled to act on its whims and wisdom in all areas of governance including key policy issues, it has actually exposed its insensitivity to the gravity of the current situation.
The caretaker set up has just been delegated limited responsibility of holding free, fair and transparent elections and transfer power to the next elected government. It should desist from toying with its bright ideas in key policy areas of economy and concentrate and try to deliver what is expected of it.
On PSDP slashing, a senior economist who wished anonymity said: “It was a spontaneous response of the finance team to calm the critics. It means nothing and they know it or they would have given more details as they must be having mid-term review of the economy conducted by the concerned department in January at their disposal”.
A quick reading of the Fiscal Responsibility and Debt Limitation Act revealed that in special circumstances exceptions could be made but not without the permission of the parliament.
“The government is required to get the ratification from the parliament if it wishes to cross over the limits set by the said law. It would, therefore be appropriate and in line with the legal requirements in the current structure if the team that managed the financial affairs of the government during the past one year is called on by the next parliament to explain their position and if found guilty of irresponsible behaviour proceeded against under the law of the land”, said another experienced economist from Lahore.
When approached the government spokesperson Dr Ashfaque Hasan Khan was not able to make himself available for comments but another senior officer expressed satisfaction for being much ahead of time over the target of bringing debt to GDP ratio to 60 per cent by the year 2011 from 90 per cent at the time when the said Act was introduced in 2004.
“I do not have exact numbers on me at the moment but the ratio has been brought down to little above sixty per cent already which in itself is a big achievement of the government”.
Another senior economist told Dawn that the central bank anxiety stems from the fact that the current trend of spending was allowed to persist the budget deficit to GDP ratio could reach troubling heights of six to seven per cent playing havoc with the fundamentals of the economy.
The influential foreign obsevers in Islamabad have privately been expressing their concern over the trend and talking of economic difficulties that the next government would inherit.
When contacted over phone and via e-mail the World Bank that closely monitors Pakistan’s economic health as a key partner in development Yusupha Crookes the country director could not be reached. The media head of the mission mailed the following response to Dawn’s request for their comment on rising budget deficit.
“In accordance with our internal communications protocols, only the Country Director speaks on macro issues. The CD is not around today and even otherwise getting a comment on the same day presents a big challenge, especially when the person making the comment is working with a disadvantage of not knowing what the full piece entails. I will try to reach the Country Director and pass on your request for a comment, but I cannot promise anything”.
According to information gathered at the start of the current financial year the government owed Rs64 billion to the State Bank of Pakistan that was to be returned over the current fiscal. Instead of clearing its dues the government over the last eight months of the current fiscal borrowed Rs320 billion over and above that amount. It would be not be right to assume even the tight monetary policy to deliver when fiscal indiscipline is so rampant.