| From the Newspaper
The behind-the-scenes scramble to finalise the 2011-12 federal budget ahead of the next parliamentary session scheduled to begin on Friday has left observers questioning the seriousness and resolve of the stewards of the economy. – File Photo
ISLAMBAD: Look no further for signs of disarray in the government’s budget team than the uncertainty over whether the budget will be ready in time for June 3. (As per usual, the U.S. backs the incompetents)
Already postponed once — the budget was originally set to be unveiled on May 28 — officials privately suggest Finance Minister Hafeez Sheikh’s budget speech may be postponed again, this time perhaps by a day or more. (Sounds like a consulting project I could have done in my sleep)
The behind-the-scenes scramble to finalise the 2011-12 federal budget ahead of the next parliamentary session scheduled to begin on Friday has left observers questioning the seriousness and resolve of the stewards of the economy. (What's to question? There is no serious, nor resolve of the so-called "stewards of the economy." They are all doing better in the environment of chaos and same 'ol, same 'ol)
“The budget as a public and sacred document has more or less become irrelevant,” says Abid Suleri, executive director of the Sustainable Development Policy Institute, adding, “Even before the budget is announced, it’s pretty clear there will be several mini-budgets in the year ahead.” (Modern MBA theory, as applied to reality, teaches that budgets are but a necessary corporate evil, an exercise designed to enrich the coffers of those who come in under budget and punish those over - regardless of relative contributions to the economy -- this has the stench of the Chicago Boyz all over it.)
The dire predictions ahead of the budget are rooted in fiscal fundamentals — overall expenditure, the budget deficit and tax revenue projections — that the government’s economic managers appear to have given up hope of controlling.“They’ve turned budget-making on its head. First they are finalising the expenditure plan and in finalising the expenditure plan they’ve taken into account the demands of key MNAs so that they are not an impediment in passing the budget,” said Dr Ashfaque Khan, a former finance official.
“It’s an incredible way of doing business. The revenue target is simply the difference between what the expenditure is projected at and what budget deficit target these guys have been able to bargain out with the IMF,” (actually, it's an incredibly brilliant way of doing business!) according to Khurram Husain, business and economic policy editor with a local media group.
Mr Husain argued that while the “key thing in a budget is the revenue figure” the tax machinery has little hope of achieving the Rs1.952 trillion target for next year. “Last year they had to twice revise it, from Rs1.667tr in June to Rs1.607tr in December and then Rs1.588tr in March. Where are the revenue measures to meet next year’s target?”
Ashfaque Khan also dismissed the possibility of the government coming close to the tax-revenue target: “The revenue target is grossly, grossly overstated. It won’t be any different from last year. Anything beyond Rs1,765-Rs1,775 billion is bound to be a failure. Targeting Rs1,952bn from day one is going to fail.”
With the tax-collection target dismissed as unrealistic, concern has already turned to the size of the fiscal deficit and, perhaps even more importantly, how the deficit will be financed.
According to Dr Zubair Khan, a former commerce minister and IMF staffer, “The deficit this year is going to be close to six per cent (of GDP). With Rs3.8tr expenditure mapped out for next year, the deficit will be no less than six per cent.”
The main worry for analysts is how a massive fiscal deficit, a recurring feature of recent budgets, will be financed yet again, particularly since relations with the IMF are strained and fresh money is unlikely unless a series of tax and other reforms are implemented.
“The financing of the deficit will be almost entirely from domestic sources, given the external constraints,” said Sakib Shirani, a member of the government’s finance team until earlier this year. “This may not be the best news for private sector credit availability.”
The problem highlighted by Mr Shirani and other experts is that with the government borrowing heavily from private sector banks at significant interest rates, the incentive for the banks to lend to the private sector — a process central to stimulating economic growth — is reduced.
Other analysts predicted an even grimmer outcome. “Eventually the commercial banks will lose appetite for Treasury paper and the government will turn to the State Bank, which will prove inflationary,” Dr Khan claimed.
Privately, officials predicted that perhaps by the third quarter of the next financial year — January-March — the government will again have to ramp up highly inflationary borrowings from the State Bank.
With the budgetary outlook so bleak, speculation has mounted about the government’s intentions.
An official involved in the budget-making process said, “The PPP isn’t too bothered. The rural economy is doing well because of artificially jumped up commodity prices. The urban economy is dead, but that impacts the N-League more. Politically, the PPP is in a very comfortable place.”
Zubair Khan was even more critical: “They’ve made enough money so that at the next election they can hand out Rs22 crores to each candidate. Asif Zardari thinks he can buy the next election with the resources at his disposal.”
With tax reform stalled and no attempt to curtail expenditure — analysts questioned why even symbolic measures such as a cut in the budget of the presidency and the prime minister’s residence were not on the cards — what comes next appears to be inevitable.
“Mini-budgets. We’re back to the bad old days of the 90s. By October they will need a new set of numbers,” Khurram Husain said.
Even then, analysts predicted a potential slowdown of the economy as a result of continuing fiscal stresses. “More deficit financing, more inflation, deeper into debt, slow down of the economy, it’s not hard to see what’s in store,” Zubair Khan said.
