The economic record of the present PPP-led federal government has been an unmitigated disaster. Most of the important economic indicators after more than four years of its rule are in a worse condition than what they were when it inherited the reins of power from its predecessor. The annual GDP growth rate has been hovering around 3 percent over the past few years. In sharp contrast with the performance of the PPP government, India recorded high GDP growth rates of 7 to 8 percent, while China’s performance was even better during the corresponding years. Even Bangladesh outperformed us. Total national investment declined to 12.5 percent of GDP in 2011-12. The national saving rate slumped to 10.7 percent of GDP. These figures reflect an utter failure of the economic policies of the present government in steering the country to a future of economic prosperity.
On top of the above, the country is faced with a serious energy crisis in the form of electricity and gas shortages, which have badly affected the productivity of the industrial and agricultural sectors, besides making the life of the domestic consumer miserable. It is true that the present government inherited these problems, to some extent, from the Musharraf regime. The problem of circular debt, which has lowered the electricity generation in the country through non-utilisation of installed thermal power capacity, was the result of flawed policies of the Musharraf-Shaukat Aziz era. But over the past four years, the present government has miserably failed to make a dent in it.
The size of the circular debt instead of going down has, reportedly, grown to Rs 250 billion, which has resulted in the under utilisation of the installed power capacity, to the extent, of 4,000MW. This is approximately the size of the current electricity shortage in the country. Thus, the resolution of the circular debt problem may enable the country to meet its power needs through full utilisation of the installed capacity. The estimated cost of the power crisis to the economy is approximately Rs 380 billion per year, that is, around 2 percent of GDP. The cost to the exchequer of subsidies given to the power sector during 2008-12 is Rs 1,100 billion or 2.5 percent of GDP. The loss to the economy due to the gas shortage is over and above these figures.
The proposed budget for 2012-13 holds the promise of only marginal changes for the better leaving the fundamental problems intact. Out of the expected gross federal revenue receipts of Rs 3.2 trillion for the year 2012-13, the provincial share would be Rs 1.5 trillion leaving Rs 1.7 trillion only for meeting the expenses of the federal government. Debt servicing alone will claim Rs 1.1 trillion. Thus, only Rs 600 billion will be available for financing the current expenditure of the federal government, which would amount to Rs 1.5 trillion in 2012-13. In other words, the federal government would have to borrow Rs 900 billion just to meet its current expenditure!
After debt servicing, the defence expenditure will claim the largest chunk of the federal government’s resources. An amount of Rs 545 billion has been allocated for defence in the budget for 2012-13. If one adds military pensions (Rs 98 billion) and reported hidden military expenditure under other heads (Rs 150 billion approximately), the total allocation for defence in the next financial year’s budget would amount to Rs 793 billion which would constitute 44 percent of the net federal revenues! This high level of military expenditure is not sustainable for a weak economy like that of Pakistan.
In view of the heavy demands on the government’s resources, the fiscal deficit would remain at the high level of Rs 1.1 trillion or 4.7 percent of GDP in 2012-13. The current account deficit would increase to $4.8 billion or 1.8 percent of GDP. The high level of fiscal deficit would force the government to rely on bank borrowing to finance it, crowding out private sector investment and generating inflationary pressures. It would also reduce the availability of funds for developmental purposes.
The government has fixed GDP growth rate of 4.3 percent as the target for 2012-13. For achieving this growth rate, the total national investment would be raised to 13.1 percent of GDP and the national savings target would be 10.8 percent of GDP. The federal public sector development programme is planned to be Rs 360 billion as against Rs 300 billion for 2011-12. However, in view of the resource constraints referred to earlier, it is doubtful whether even these modest targets would be met.
The low level of revenue collection is an important factor responsible for the current huge fiscal deficit. During 2011-12, the revenue to GDP ratio declined to the miserably low level of 8.5 percent, reflecting the inability of the government to widen the tax net and the failure of the well-to-do classes to pay their taxes. The average of this ratio in the developing countries is 15 percent. Unless the revenue to GDP ratio is raised substantially, there is little hope for the country to regain fiscal balance. There are serious doubts, however, whether the government would achieve its modest target of revenue to GDP ratio of 10.1 percent for 2012-13.
In short, the proposed budget for 2012-13 does not come to grips with the fundamental problems and weaknesses from which the economy suffers. It offers palliatives, instead of the bitter medicine that our sick economy needs. The fiscal and current account deficits will remain at unsustainably high levels forcing us to rely heavily on bank borrowing and, perhaps, to have recourse to IMF. The economy will, therefore, continue to suffer from inflationary pressures. The recourse to IMF will avert a balance of payments disaster in the immediate future, but will merely postpone the day of reckoning when we will have to administer the bitter dose of austerity and raising the tax to GDP ratio through widening the tax net. The low level of targeted GDP growth rate will neither alleviate poverty, nor lower the level of unemployment.
The budget does not promise to resolve the current energy crisis, which has lowered the productivity of the economy, besides causing hardship to the domestic consumer. From a long-term point of view, it seems that we will continue our deplorable policy of neglecting the education sector even though education is the primum mobile of economic growth. It is nothing less than shameful that under this so-called “Awami” government, the allocation of national resources to education has declined to well below 1.8 percent of GDP, as against the recommended international norm of 4 percent of GDP. The allocation of resources to health is at the abysmally low level of 0.3 percent of GDP! Little wonder that the downtrodden throughout the country are up in arms against the total failure of the federal government to provide good governance.
n The writer is a retired ambassador and the president of the Lahore Council for World Affairs.