For a sustainable democracy - Dr Ashfaque H Khan - Tuesday, March 01, 2011

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Every political party in a democratic set up would claim to work for improving the country’s economy, creating employment opportunities, reducing or even eliminating poverty, and improving living standards of the people once it comes to power. However, historically, it has been observed that the economy has remained off the radar screen of political parties in Pakistan. None of the political parties has a credible economic team.

The last three years have seen the economy being neglected by the present political leadership. Everything under the sun has been discussed and practiced but the economy has remained out of focus. Five finance secretaries, four finance ministers, three governors of the State Bank of Pakistan and four chairmen of the Federal Board of Revenue in the last three years speak volumes about the importance accorded to the economy. In the midst of instability in the economic team, should we expect stability and progress in the economy?

Pakistan’s fiscal situation has deteriorated immensely over the last three years owing to the unwillingness of the government to broaden tax bases with a view to mobilising more resources on the one hand and rationalising or reducing wasteful expenditure on the other. Irresponsible spending by provincial governments and dwindling provincial tax efforts have further weakened Pakistan’s fiscal balance. Resultantly, Pakistan’s dependence on external resources, even to finance wasteful expenditure, has increased. Accordingly, public debt has ballooned during the last three years, matching the accumulation of debt over the last 60 years.

Pakistan’s finances are in a deep crisis. In the absence of external flows, the government has been borrowing heavily from the SBP to finance its revenue - expenditure gap. Such financing is inflationary and has been one of the root causes of persisting high double-digit inflation. Higher inflation has forced the SBP to keep discount rate at an elevated level which, in turn, has increased the cost of borrowing, lowered investment rate, slowed economic growth, led to more unemployment and a rise in poverty.

The current government is weak and has become a lame-duck. Its economic team has largely consisted of ‘strangers in the town’, totally oblivious to the ground reality. Accordingly, the government’s ability to take difficult decisions has been eroded. Under the pressure of its allies and opposition in parliament, the government reversed its own decision of passing on the rise in international price of oil to domestic consumers.

It is abundantly clear that the government cannot undertake any meaningful economic reform without the support of the major political parties in parliament. Accordingly, the government entered into negotiations with PML (N) to agree on an economic reform agenda. By looking at the composition of the teams on both sides, it was clear that no one was serious about addressing Pakistan’s fiscal challenges.

After every meeting, the two finance ministers (present and the former) would talk to the press, highlighting the progress on setting up an independent election and accountability commissions but never spoke on the subject of public interest. No mention was ever made during the 45 days of negotiation on tax reform, that is, on the issue of RGST, bring agricultural income under direct tax net, imposition of flood tax, improving provincial tax efforts, devising mechanisms to pass on the higher international fuel prices to domestic consumers, salvaging the new NFC Award, the issue of circular debt, power sector reform, and rationalisation of expenditure.

The nation waited painfully for the positive outcomes of the 45 days parleys. The talks ended with anticipated outcomes. After 45 days, the government is still nervous about passing the high cost of imported fuel to domestic consumers and reluctant to bring the RGST bill in parliament for voting. Isn’t it a waste of national time? After 45 days, we still haven’t made any headway.

Political temperature in the country is on the rise. The battle lines have been drawn. Should we expect the lame-duck government to undertake meaningful economic reform in the present scenario? The staff level IMF mission will be visiting Pakistan on March 1, 2011 to gauge the government’s intention, willingness and capacity to undertake tax reform.

Pakistan is facing serious budgetary problems. The gap between resources and expenditures is widening. If no corrective measures are taken, the gap can swell to eight percent of GDP. With the IMF programme remaining under suspension, inflows from other development financial institutions and friendly countries may also have been disrupted. How can Pakistan finance its yawning fiscal gap is the most serious budgetary issue facing the country. Political leaderships across the political divide are totally oblivious to the current economic crisis in the country.

The political leaderships’ interest in the economy is limited to the speeches in parliament, press conferences, talk shows and populist measures. The rest of the people of Pakistan are suffering from persistence of higher double-digit inflation, lack of employment opportunities, decline in their real incomes, and rise in poverty. Economy has remained out of focus for the last three years and there are indications that this will remain so in the remainder of the period.

Can a lame-duck government and weak economic team revive the economy? Can it enforce financial discipline? Can it succeed in keeping budget deficit at sustainable level? Can it manage to finance fiscal gap in a non-inflationary manner? These are valid questions and the answer appears to be in the negative given the rising political temperature and new political battle lines drawn in the country. Times of economic difficulty are likely to persist with serious social consequences not far behind. Political leaderships must give priority to economic revival, in their own interest. Without a sound economy, the political system will remain fragile. For a sustainable democracy, Pakistan needs reforms both in the political system and the economy.

The writer is the Principal & Dean at NUST Business School (NBS), Islamabad


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