Wasteful expenditure and guesstimates
There is a chandelier in the prime minister’s secretariat costing Rs20 million. Current expenditure other than interest payments and defence have shot up from Rs296.5 billion in fiscal 2000 to Rs1,225.1 billion (budgeted) in fiscal 2008.
The Musharraf regime had an army of ministers, ministers of state, personal assistants, advisors and consultants. God knows whether they had enough office work to keep them busy. There are ghost institutions, staff, pensioners, nonschools and hospitals in thousands.
The expenditure on development projects, subject to delays in execution and cost overis a fraction of the cost booked for payment. The balance is siphoned off, all along the way.
Projects are seldom completed on time and cost over runs are quite common. What emerges is so sub-standard that repairs often become necessary before the project completion. Many soon end up in disaster, claiming precious human lives. The Lyari Expressway in Karachi is a classic example. It collapsed within days. However, no head rolled.
Pakistan is endowed with tremendous resources both physical and human to make it the envy of many developing countries. It is not the resource availability alone but their actual use, for which the economic management is of crucial important and in which, the country has been woefully lacking in recent years. The current crises of food and electricity are the most eloquent proof. In purely economic terms, 9\11 was a Godt bonanza as it flung open the doors for external resources, shut following the nuclear explosion in May, 1998.
In fact, foreign governments as well as IFIs under their influence made a beefor Islamabad to help the “frontstate against the so-called terrorism. The event also panicked Pakistanis who had parked their savings abroad. The overseas residents also felt unsafe and the US discouraged the flow of remittances through non-official channels.
The result was a sharp increase in remittances from abroad, up to $5.6 billion in FY 2008 from up less than $1 billion in FY 2000.
There has been a significant increase in inflow of external resources from other sources: medium and longcapital (net) flows shot up from $319 million in FY 01 to $10.1 billion in FY 07. The aggregate for this period was $18.7 billion, a tidy sum for any country.
The annual inflow of public and publicly guaranteed capital increased from $410 million to $2.1 billion and the aggregate was $4.6 billion. In the case of private sector, the annual figure rose from minus $91 million to $8.1 billion and the aggregate was $14.1 billion.
For the private sector, direct investment increased from $286 million to $5 billion to give $12.4 billion over the period. Simultaneously, portfolio investment also rose from minus $140 million (all outflow) to $2.9 billion.
The degree of exposure of the economy to international factors went up from 23.2 per cent ($= Rs51) of GDP (MP) in FY 00 to 37 per cent ($=Rs70) in FY 08 in terms of foreign trade. The ratio goes up, if current account transactions and capital and financial account are also considered.
Economic managers, giving the devil its due, in an effort for personal image building, began to claim undue credit by even misrepresentation of economic facts to create a false euphoria. The stark example is the claim at the highest level: “We have broken the begging bowl” and, “We don’t borrow any more but lend to others”. These observations were made when the external debt was rising.
External debt and foreign exchange liabilities have, in spite of debt writegone up from $37.9 billion to $40.4 billion in FY 07 and $46.3 billion in FY 08. Of these liabilities, external debt rose from $32.3 billion in FY 00 to $44.5 billion. Within this group, public and publicly guaranteed debt rose from $27.4 billion to $40.2 billion.
Strained as the economy has been, it was expected that the unexpected large availability of resources would remove the basic infrastructure weaknesses and enhance the productive capacity. Instead, other than the increase in foreign exchange reserves, these external resources have been just squandered away.
It is officially claimed that even though the absolute amount has increased, that federal government debt, both domestic and external, had gone down as a ratio to nominal GDP. The capacity to retire government owed external debt depends not on its GDP\GNP ratio but on revenue.
The additional factor, also relevant for private external debt is the availability of foreign exchange, depending on the level of the existing foreign exchange reserves, current foreign exchange earnings, for which exports are the most crucial element, and overall position of current account in balance of payments. At the moment, these relationships obviously present a very dismal picture.
One needs to look at factors responsible for the crises, that occurred in spite of the “high growth” claimed by the previous government.
First, the method of working out the growth rate What is termed as “estimate” is nothing but “guesstimate” reflecting a wish more than the hard facts.
National income data released on the eve of the federal budget, generally in early June, is based on nineperformance of industry, target for the wheat crop, and the likely outcome of fiscal operations during the year. A lot of water passes under the bridge at the fag end of the fiscal year as for as budgets are concerned. These constraints are understandable, but the data must be updated and finalised as soon as the complete relevant information is available. This is easily possible at the end of September. Surprisingly, this is not done and the guesstimates are carried till the next pre-budget Pakistan Economic Survey.
The nature of growth is of crucial importance for the welfare of the masses. This scribe has in an earlier article, “Why poverty Persists”, (EBR, November 19, 07), high lighted the basic flaw in the structure of growth which makes it proEconomic growth in recent years has been mainly on account of services sectors and the performance of commodity producing sectors has been lacklustre; hence the current electricity, food and balance of payments crises.
The rate of increase in value added in commodity producing sectors has declined from 9.3 in FY 05 to six per cent in FY 07 and 3.2 per cent in FY 08. The rate for agriculture fell from 6.5 to 1.5 per cent over this period. For major crops, the rates were 17.7, 8.3 and minus three per cent.
Prudence demands that when confronted with a sudden large claim on fiscal resources, government would make corresponding adjustment in other expenses to accommodate it. However, the federal government did not care and the result was a huge budget deficit which was mainly financed by highly inflationary borrowing from the central bank. This added fuel to the fire.
Ignoring the fiscal difficulties, the present democratic regime increased the budget size by no less than 29.8 per cent. However, it soon realised the mistake and is now engaged in pruning the budgetary provisions and restricting the actual release of funds.
Fiscal policy being expansionary, burden of adjustment has been thrown entirely on the monetary policy. The State Bank of Pakistan (SBP) has been tightening its monetary policy since the fag end of FY 05.
The bank rate or REPO, has been gradually enhanced from nine to 13 per cent as of July 08 and cash reserve requirement also raised. The primary purpose of tight monetary policy is to contain aggregate demand in the economy and align it with the supply situation. For this, the monetary policy has to influence the “cost” and “availability” of credit and the two elements must support one another
The tight monetary policy led to an increase in interest charged by financial institutions particularly commercial banks. The weighted annual average of rates for advances increased from 8.8 in FY 05 to 12.42 per cent while the average for deposit rates moved up from 1.3 to 6.94 per cent as of June 08. This means negative real interest rates, in spite of the recent increase.
Interest rate will bite only if it is positive in real terms. It may be pointed out that there is a wide dispersion of interest rates charged on bank advances. Privileged borrowers get it cheap while the rate is irrelevant for those big borrowers who ultimately get their loans written off. According to the SBP’s Third Quarterly Report on the State of the Economy FY07, loans of Rs16.1 billion were written off during July- March FY 07 by commercial banks compared with Rs6.9 billion in the same period of FY 06.
Credit expansion can be effectively restrained only by eliminating excess reserves with banks, which determine their capacity to lend. In FY 05, liquid assets of banks were in excess of the minimum requirement to the tune of Rs269 billion. They had declined to Rs216 billion at the end of April, 08.
Market interest rates are influenced by the credit availability. Excess liquidity in the economy would hold them down. In order to make the interest policy effective, the availability of credit must be controlled. In this regard, there is a serious element of contradiction. Between FY 05 and FY 07, domestic credit had increased by 32.2 while the increase in real GDP (MP) was 12.6 per cent. During FY 08, domestic credit increased by 28.8 as against the growth rate of six per cent.
The SBP plays an active role in creating excess liquidity. For the entire period of the tight monetary policy, the SBP accounted for the entire increase in reserve money while its share in total outstanding reserve money as of end June 08 was as high as 85 per cent.
‘The ratio of currency in circulation to reserve money was 66.8 per cent. The bank injected it not only through lending to government but also by lending to and investing in financial institutions, the two figures for the whole period being Rs1,0 15. billion and Rs235 billion.
With real interest rates being negative and no restraint on credit availability, the tight monetary had little impact on aggregate demand. Instead this demand continued to increase at a brisk pace. Total expenditures in current terms increased by 17.3 in FY 06, by 14.4 per cent in FY 07 and 20.12 in FY 08. In constant terms, the rate of increase has been around six per cent per annum.