Understandably enough, everyone is edgy on the eve of the 1994-95 Budget. “It’s going to be tough” warns prime minister Benazir Bhutto. The poor are agonising about how to survive these times of double-digit inflation. The middle classes are agitated by the threat of falling living standards and rising unemployment. The business classes are worried about higher taxes and falling sales. Foreign companies are concerned about profitability and international donors are dubious about the prospects of economic and political stability. If the government is losing sleep fretting over the consequences of public agitation and strikes in the wake of the budget, it isn’t surprising in the least — all these fears are well grounded. But we have been living way beyond our means. It is time to call a spade a spade and get on with a bit of surgery.
Prime minister Bhutto claims that she has inherited a wayward economy from Nawaz Sharif who went on an irresponsible spending spree to build a vote-bank. Up to a point, of course, her allegations are true. But the problem didn’t begin with Mr Sharif, nor is it likely to be put right by Ms Bhutto only on the basis of the next budget.
The structural imbalances in the economy have simply got worse over time. Domestic savings remain low — hence foreign borrowings and debt-repayments have progressively risen; consumer imports are buoyant, foreign remittances are falling, value-added exports are sluggish — hence the value of the Rupee has fallen over time; non-development expenditures are prohibitively steep, development outlays are grossly insufficient — hence infrastructural improvements in energy, transport and communications have had to be postponed. The net effect of all these tendencies is to widen the fiscal deficit, fuel inflation and make us even more dependent on foreign borrowings.
Ms Bhutto’s policy is aimed at bringing the budget deficit down, from 9 per cent last year to 6 per cent this year and down to 4 per cent in 1995. This entails a two-track approach: cut expenditures and increase revenues, then invest wisely in the social sector and renew the infrastructure. No one should fault her for such sensible objectives.
But some people do. There are politicians, businessmen and even intellectuals who accuse her of “selling out to the IMF”. But such charges are either due to misplaced concreteness or sheer ignorance about how the economy works. Indeed, if Ms Bhutto is successful in reducing the fiscal deficit and reorienting the government’s spending priorities, she will, in fact, lessen Pakistan’s long-term dependence on international donor agencies and make the country more self-reliant.
But there are more substantial objections to the IMF conditionalities which Ms Bhutto must contend with. Although few would argue against the necessity of extending VAT across the board, a good case can certainly be made out to start with a low VAT this year and increase it progressively in the next few years — perhaps from about 8 per cent this year to 15 per cent in 1996. Similarly — because the economy is in a recession — it can be argued that government should not cut development spending drastically or even immediately. In other words, there may be greater merit in a fine-tuned policy which allows for a 6 per cent fiscal deficit during the next few years rather than one which makes it problematic for the economy to pull itself out of the recession.
The problem with this line of thinking, of course, is that it may be difficult to persuade foreign donors to accept its viability. If the IMF and the World Bank are insisting upon a package of do-or-die conditionalities this year, it is only because we have forced them to take such a harsh stance. Pakistan’s credibility with international financial institutions has plummeted to an all time low in recent years because we have blithely broken all our commitments to them. Every year our finance ministers have lined up for financial assistance in Paris or Manila or Washington and promised donors that they will impose financial discipline, reduce the deficit and repay debts on time. Then they have come back home and done exactly the opposite — when Mr Moeen Qureshi took over last July, Pakistan was on the verge of defaulting on its international obligations.
Mr Nawaz Sharif, of course, intends to exploit the situation. Since he is acting within his rights, Ms Bhutto might be advised to tone down her budgetary toughness for reasons of political necessity. Now that everyone is keyed up to expect and resist the worse, it would be in the fitness of things to somewhat deflate anxieties all round on B-day. If the very poor are protected and the middle-classes are given some compensatory relief against inflation, no one will grudge Ms Bhutto’s attempts to make the rich pay more taxes.
One small matter remains. When we are all being asked to tighten our belts for take-off, why should our rulers continue to bask in luxury at state expense? Certainly, they have no business buying luxury aircraft or taking along a cabal of friends and relatives whenever they travel abroad on official duty.