For months we were told by prime minister Nawaz Sharif and finance minister Sartaj Aziz that their revolutionary economic reforms had worked wonders for the economy. In fact, in a briefing to newspaper editors on the 9th of June, the PM said that the economy was continuing to grow at about 6 per cent per year. Now comes the Economic Survey of Pakistan, 1992-93, which gives the lie to all these claims and reveals a truly bleak picture of the economy. For the first time in over a decade, the growth rate of the economy has fallen well below 6 per cent. In fact, it was halved to 3 per cent in 1992-93!
The government’s Economic Survey offers a two-fold explanation for this debacle. It says that agricultural output fell by 3.9 per cent because the 1992 floods adversely affected the cotton crop. This hurt the leading sector of the economy, the textile industry, whose “troubles” (which include a world recession) are largely responsible for the decline in the economy. Political uncertainty, adds the government, “also proved costly” because it undermined “business confidence”.
Frankly, these excuses are totally misleading. A decline in agricultural output of a mere 4 per cent should hardly slash the rate of growth of the overall economy by over 50 per cent! Also, if the floods adversely affected the cotton crop, they were also expected to yield a bumper wheat crop. What happened to that? As for the textile sector, we understand that it is beset by excess capacity rather than troubled by any shortage of raw cotton. That’s why it is worth asking why the government allowed new industrial capacity to be installed in this sector when there was a continuing slump in the demand for its products worldwide?
Regarding “political uncertainty”, we might point out that we have been plagued by this curse since 1988, so there is nothing new about it. At any rate, the impact of adverse business decisions, if any, in the 39 days in which Mr Sharif was out of power, is still to come. No, structural reasons related to government mismanagement have more to do with the economy’s dismal performance than the ones blithely listed in the Economic Survey.
The fact is that there has also been a deceleration in industrial production in 1992-93. Value-added in manufacturing grew by 5.6 per cent in 1992 compared to 8.3 per cent in 1991. And this, despite the fact that monetary expansion during this period has been unprecedented — Rs 71.76 billion in only the first six months of July-December 1992!
Where has most of this money gone? Was the medium and small-scale private sector starved of credits for industrial investment and growth? The answer to this crucial question is that Mr Sharif’s government mopped up a large chunk of funds meant for private productive investment and diverted them to prop up its non-productive budgetary expenditures. Why did it do that? Because the government couldn’t or wouldn’t increase its revenues by taxing its political supporters in trade, business and agriculture! And, of the meagre funds left with financial institutions for private sector investment, tens of billions of rupees were stupidly spent on government-sponsored non-productive schemes like the notorious and gimmicky yellow-cabs programme (Rs 20 billion). So the private sector was left to wring its hands in despair at a time when it desperately needed credits following the floods and the removal of credit ceilings in August 1992. Meanwhile, the government merrily went along to revise its budgetary estimates (from Rs 70 billion to Rs 100 billion) for borrowings from banks and external sources.
In June 1992, Mr Aziz told us the deficit in 1992-93 wouldn’t go beyond Rs 65 billion. In the end it shot up to Rs 100 billion, over and above the revised estimates of Rs 89 billion. Now comes the budget of 1993-94, threatening a deficit of Rs 107 billion. Will this also go through the roof and have to be revised later? Will Mr Aziz be indeed able to raise Rs 18 billion in new taxes and bring it down to Rs 85 billion as he is promising? Or, as in the past, will Mr Aziz squeeze the small-scale private sector and diminish the economy’s growth potential by mopping up most of the funds available with financial institutions and give them to Mr Sharif so that the prime minister can spend them to his heart’s desire on all the “yellow” schemes in the world?
There are, of course, a number of plus points in the budget from a purely technical, revenue point of view. The 10 per cent increase in the prices of petroleum products, to be revised quarterly according to the depreciation of the rupee, should provide a simple mechanism to milk billions of rupees in revenues. Although the finance minister hasn’t announced any upward revisions in the costs of other utilities, like gas and electricity etc, it is almost certain that these will follow in supplementary budgets once Mr Sharif is on a surer political footing. So additional billions will flow into the treasury’s coffers. The extension of the 5 per cent Iqra Surcharge to almost all imports is a neat financial gain also, as is the application of the General Sales Tax to a number of items. All these measures will provide a certain degree of elasticity to the tax system.
But they will also hit the general public, the relatively poor much more than the relatively rich, and are bound to fuel inflation. If the rate of monetary expansion continues at its current high level of 15 per cent in order to facilitate non-productive government expenditures, we may rightly expect inflation to become a major irritant within the next few months. Mr Aziz says inflation is about 10 per cent per year at the moment. But nobody believes him, least of all the middle classes who want, for example, to be able to eat meat but cannot anymore. Of course, Mr Aziz’s basket of goods which measures the price index doesn’t give much weightage to meat anyway, so he isn’t too bothered by the inability of the middle classes to have something they’re not supposed to crave in the first place!
If we look at some of the other budgetary proposals, we are struck by their incongruity. Excise duties on refrigerators, dish washers, air conditioners, tape recorders, VCRs, radios and cosmetics are down. The rationale for this is that sales of domestically assembled or produced goods will be boosted, thereby increasing government revenues by discouraging smuggling. What a cunning idea. Because the Customs department cannot be tightened up, the government has instead made up for its deficiencies by giving a shot in the arm to its political supporters in the trading and industrial classes.
The reduction in the import duty on cars is another blatant case of alleviating the “hardships” of the rich. Import duties on cars over 1300 cc, especially on those over 1800 cc like the costlier BMWs and Mercedes, have been progressively slashed, from as much as 500 per cent to 125 per cent. Given our foreign exchange crunch, that’s all we need. A couple of lucky dogs (agents, actually) obviously stand to make a neat packet out of this indecent proposal. Wait for it. The BMWs and Mercs should give the 50,000 yellow cabs on the roads a good run for their money soon enough.
There’s more. The richie rich should now be able to spill out of the Avari or the Marriott or the PC whenever one of their lucky sons or daughters is getting hooked — excise duty on marriages held in four or five star hotels is down from 30 per cent to 20 per cent. In contrast, the struggling middle-classes now have to fork over an additional 10 per cent for hiring “shaadi halls”.
The customs duty on paper is up by 100 per cent. This is a perfect incentive to become even more illiterate than we are today. The excise duty on Knitting yarn is down by 60 per cent (from Rs 5 per kg to Rs 2 per kg) which should please the textile magnates but actually doesn’t — APTMA is still insisting that the rupee be devalued to save the textile industry from ‘ruination’. And cement prices will go up further, which is just one of the continuing benefits of privatisation.
This is just the tip of the iceberg. Government employees were expecting a 20 per cent increase in salaries as announced earlier by the government. Now they have been told to wait for six months before the various committees set up for the purpose of assessing their net worth submit their reports. We suppose yet another supplementary budget may be in the offing by the end of the year. And so on.
Is there any structural shift in the priorities of this government? Sadly, we think not. The rich are shamelessly clucking in appreciation, the poor are burdened by more empty promises. And if the government is as reckless as it was last year in its spending priorities, we can demur with the candid observation of a senior diplomat from a donor country: “Two more years of Nawaz Sharif will bankrupt Pakistan”.