Rethinking Financial Management

How to tame the countrys mounting debt (both domestic and foreign) and what policy measures need to be adopted in the annual budget (to be announced towards May/June 10) are the two main questions facing our economic managers today. Sadly, their performance thus far does not inspire any confidence since they hardly seem to know how to tackle these issues.
Actually, judging by the policy directions of last years budget, unbridled expenses of an unnecessarily large government, gross micro-mismanagement of state-run corporations and a continuously dwindling Pak Rupee, it does not look reasonable anymore to expect Pakistans deficit to come down in the foreseeable future. The government continues to rely on the IMF rather than shoring up its own economy to pay its bills and the natural fallout of this is seen in the shape of: growing national debt, shrunken economic activity, rising production costs and a worryingly ballooning unemployment. Unlike other developing countries, Pakistan lacks the automatic stabilisers that kick in during times of recession to help boost demand and growth.
Unemployment, healthcare and education benefits are extremely limited. A big chunk of social welfare programs are NGO driven, i.e. supported by foreign funds, so when their funding or resources get affected like in recent times (owing to a global financial meltdown and a resultant recession), they make painful cuts, firing workers and ending programs - thus exacerbating the downturn rather than offsetting it. When this happens, realistically, only the federal government can fill the gap. However, if in times of such desperate need, the central government on the contrary (as in our case) happens to be too parsimonious or ironically are eager to cut support to its own people when presumably they need it the most, the recession magnifies and makes the deficit even worse over time.
In Pakistan, any real long-term planning still tends to be a luxury, which has so far eluded us. Therefore, there is no option but to, at least for now, primarily focus our concerns only on the medium-term outlook. The present IMF borrowing program of the government appears to be a road map to fiscal catastrophe. Before we know the chicken will be home to roost, it will be payback time, and if the current trend continues (increasing public debt and shrinking economy) we may find it extremely difficult in a few years to meet our financial obligations owing to an unsustainable level of the public debt, possibly around 65-70% of the GDP. Further, as we know in the medium-term there are only two ways to bring the deficit back to a sustainable level. Either taxes will have to rise or serious attempts must be made to embark on a severe austerity drive. The Finance Ministry (at least overtly) seems to be focusing only on the first and not at all on the second. Given the present perception about the govt and its governance, option one is unlikely to yield the desired dividends and in case of pushing the issue via state coercion the resultant negative reaction can in fact be quite detrimental to an already shaky economic climate.
The question then arises is: what should be done? For starters, no one dare touch defence in a troubled world and especially in a troubled region like ours. Further, the aversion of public to IMF bail-outs is quite understandable, even laudable - To a common man nothing would encourage more the reckless spending on the part of the government than knowing that they can at the end of the day always borrow more and that too at the expense of people who not only suffer now, but will also have to in future pay back with interest the yester sins of their governments. Talk to an average man on the street and while he may sympathise on account of external negative effects of global recession, speculators, credit squeeze, etc., his real blame lies with home management of economic affairs. Blatant fiddling with national accounts to disguise government borrowings coupled with across-the-board micro-management failures has shot to pieces the credibility of the country, deep structural weaknesses in the economy have simply been left to fester, and the government has lived and spent beyond means for far too long. In short, savage austerity is now inevitable.
Though a little bit far away from home, Greece (now in the Euro Zone) quickly comes to mind as it is also witnessing similar, if not identical, challenges. EU (the parent body) reluctant to repeat a 'free lunch bail-out package of the mid 80s, is now instead calling for the IMF to step in and impose financial discipline on Greece. However, in comparison to the package extended to us, there are some fundamental differences in the terms of engagement being sought for Greece from the IMF. These include, (a) Since, historically the Greeks are known to fudge their national accounts, this time around the austerity measures to be implemented by the Greek government will be monitored by the EUs statistical agency Eurostat and therefore the IMF will rely more on the EU rather than the Greek Ministry of Finance. (As we cannot resort to a similar body, perhaps in our case this can be accomplished by a monitoring cell under the auspices of the Supreme Court), (b) IMF support will mainly focus on budgetary support measures and a pragmatic plan will be put in place for cutting fiscal deficit gradually instead of resorting to quick massive surgeries. (We also need to convince the IMF to work with Pakistan on similar lines and terms), and last but not the least, (c) Greece will embark on a five-year plan, again under the surveillance of EUs Eurostat, to reduce its public debt to a manageable level (details on what is 'manageable are still being worked out and yet to be released). Pakistan also needs to follow suit on such an endeavor, if it is to avoid default and humiliation in years to come