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Tuesday, July 13, 2010

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A candid presentation
Dr Ashfaque H Khan The finance team, led by Dr Abdul Hafeez Shaikh, gave a frank and blunt presentation on the state of the economy in general and the budget and its financing difficulties in particular to the prime minister during his first visit to the Ministry of Finance on July 9. The timing of such a candid presentation was important because Pakistan has just entered a new fiscal year and a month-long engagement with the IMF to review the existing programme is about to begin. The presentation to the prime minister was exactly in line with my assessment of the state of finances that I have been sharing with the people of Pakistan through my columns. The finance team informed the prime minister about the deleterious condition of the country's finances owing to the fiscal profligacy of the federal and provincial governments. Budget deficit for the year 2009-10 ended at 6.2 per cent of GDP as against the target of 4.9 per cent for which the government will have to seek waiver from the IMF. The prime minister was also informed that the display of stunning financial indiscipline by the provincial governments and the political leadership have already created serious difficulties for the finance team in achieving fiscal deficit target of 4 per cent of GDP for the year 2010-11. Unless corrective measures are taken quickly, the budget deficit is likely to be in the range of 6.5-7.0 per cent of GDP in 2010-11. The prime minister was bluntly told that the politicisation of VAT has added further fuel to the fire. If Pakistan fails to implement VAT or refined GST on October 1, 2010 it will face serious consequences. There will be no money from the IMF, the World Bank, the Asian Development Bank and perhaps from the Kerry-Lugar Act. The consequences of going off the IMF Programme were explained to the prime minister in greater details. The prime minister was also informed as to how the bleeding of the eight public-sector enterprises (PSEs) is damaging the economy and budget. Restructuring and then privatising these PSEs within the next twothree years are the only solution for which the finance team would require political support. The prime minister should immediately call the meeting of the chief ministers of the provinces and the heads of the political parties that have representation in parliament, and ask his finance team to give them a frank assessment of the state of finances. The outcomes of the presentation must include; (i) provincial governments committing to deliver a surplus of 1.5 per cent of GDP by cutting expenditures;(ii) the prime minister downsizing the federal cabinet to 20-25 ministers; (iii) allocation under the Benazir Income Support Programme be reduced to the actual spending of last year; (iv) rationalising allocation for the IDPs and (v) reducing subsidies to bare minimum. In short, the outcomes should be one of austerity at all levels of governments. The above listed measures are of short-to-immediate nature but Pakistan's key economic challenges are structural and require inter-ministerial coordination to address them. Finance Minister Dr Abdul Hafeez Shaikh is one of the many cabinet ministers and has no control over the workings of other economic ministries. It is the finance minister who deals with the IMF and other International Financial Institutions (IFIs) and is responsible for implementing their programmes, which require inter-ministerial support. How to streamline the workings of the economy of Pakistan? In East Asia, the economic planning minister (finance minister) is also the deputy prime minister, in charge of several economic ministries. The prime minister deals with political (domestic and external) issues while the deputy prime minister handles the economy. In Pakistan, we do not have the provision for deputy prime minister; therefore, the prime minister may appoint Dr Shaikh as senior minister for economy, in charge of commerce, industry, water

and power and petroleum and natural resources in addition to his current portfolio of finance planning, economic affairs and statistics. As senior minister, Dr Shaikh will coordinate and chair the meetings of the economic ministries. It will quicken the process of decision-making and help improve economic governance. The finance minister has already pointed out in his budget speech that he intends to restructure the PSEs in 2010-11 to make them attractive for privatisation going forward. The PSEs are bleeding and have become a permanent burden to the budget. The government has spent Rs245 billion in 2009-10 to keep these PSEs afloat. How long can the government keep pumping taxpayers' money to finance the inefficiencies of the PSEs? The quicker these are restructured and then privatised, the better it is for the budget and the economy. There are vested interests which will be opposing privatisation of these PSEs. Dr Shaikh as finance minister alone may not succeed in his efforts but as senior minister he may succeed in restructuring and then privatising these loss-making institutions.

The writer is director general and dean at NUST Business School, Islamabad. Email: ah khan@nbs.edu.pk

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