Wednesday, January 5, 2011

Economic reforms in serious trouble

ISLAMABAD: With the government facing a battle for survival, the federal budget and economic reforms are in serious trouble.
Although officials of the finance ministry insist there is no stepping back from economic reforms given the international commitments and rapidly growing fiscal deficit and inflation, independent analysts believe the reform agenda may already have been shelved.

In this background, Prime Minister Yousuf Raza Gilani has convened a meeting of all parliamentary party leaders on Thursday so that his economic team could present before them facts and figures on the precarious economic situation and send home a strong message of economic meltdown in case of political expediencies.

Officials said that the government would have to resort to extra borrowing from the State Bank to finance a fiscal deficit that could cross 7.6 per cent of the GDP (Rs1285 billion) against a revised target of 4.7 per cent.

“The more you borrow for budgetary support, the more you contribute to inflation that is already touching the roof,” an official said. The situation was no different when the PPP came to power three years ago.
Government officials said that they would fight till the end for going ahead with the reform programme, which included introduction of additional tax measures worth Rs62 billion.

“We are not in a position to escape the reforms programme. We cannot dodge the international community anymore,” a senior government official told Dawn on Tuesday.

He said the finance ministry had not only opposed delaying taxation measures but also proposals to reverse the hike in prices of petroleum products announced last week.

“We will have to resort to currency printing and snowball inflation if oil prices are curtailed.” But this determination had no buyers outside.

“A lame duck government cannot pursue any economic reform programme. All economic reforms, including introduction of Reformed General Sales Tax, are either already shelved or being shelved,” said Dr Ashfaque Hassan Khan, a former economic adviser in the Musharraf administration and the Dean of the Business School of National University of Science and Technology.

He said the government was currently fighting for its own survival and although it was not serious in implementing reform programme in the first place, chances for such reforms are now negligible.

“There will be a serious budgetary crisis in the near future,” he said. These views were reinforced by Sakib Sherani, who until recently worked as the government’s principal economic adviser.

“All bets are off because of political instability,” he said after Punjab Governor Salman Taseer’s murder. This will have a negative impact on investments and markets.
He said the recent political events and the murder of Mr Taseer would have two or three major casualties, including more uncertainties in the immediate future and reform programme in the long term.

“The unfolding events will make it more difficult for the government to push through reforms.”
Mr Sherani said that the government had not focused on tax administration, a factor critical to the success of RGST.

“Now the government will have to rely heavily on the State Bank of Pakistan for financing 60-70 per cent of fiscal deficit.”

Both Mr Sherani and Dr Ashfaque agreed that there would be no immediate balance of payment crisis.

“There is no immediate threat on the balance of payment front because a couple of buffers are still there,” said Mr Sherani.

He said the precarious balance of payment position that confronted the government in 2008 was not an issue at present.

He said that the country’s foreign exchange reserves were reasonable, repayments to the IMF were to be made after two years and the current account had been in surplus for three consecutive months starting from September this year. Moreover remittances are flowing in.

Mr Sherani, however, warned that the current instability could put pressure on foreign exchange reserves because of the flight of capital and dollarisation of economy as uncertainties grow.

The weak fiscal situation always had a negative impact on current account, although with a lag effect, he said.

Dr Ashfaque Hassan said that foreign inflows were still there on the back of better remittances from overseas Pakistanis and exports, resulting in a narrow current account deficit but if oil prices maintain a rising trend in the international market, then balance of payment problems could arise in six to 12 months.

To top it all, the power sector remains the biggest challenge for policy makers.
Consuming over Rs225 billion per annum through losses, the power sector has emerged as the biggest non-productive drain on the budget.

In contrast, the development programme that should trigger investments and public service programmes for employment and economic activities, has been curtailed by more than half to about Rs175 billion.

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