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Dr.Akmal Hussain
Newspaper: The Express Tribune
Dated: Friday, 7th June 2013

The speech of Mian Muhammad Nawaz Sharif in the National Assembly as leader of the house gave hope to a suffering nation of a new dawn that would bring prosperity, peace and an end to power outages. At this juncture in Pakistan’s history strengthening democracy requires rapid and equitable economic growth. However to achieve this aim in the medium term a careful budget strategy would have to be crafted in the year ahead.

The challenge of the budget design is to balance the objective of stimulating growth with the apparently conflicting objective of bringing the budget deficit under control. How can this balance on the knife edge be achieved? The answer lies in a drastic reduction in non productive expenditure and a sharp increase in development expenditure. At the same time a range of measures need to be initiated for increasing revenues including widening the sales tax base, removing exemptions and increasing direct tax revenue not through squeezing the existing tax payers but by bringing more tax payers into the tax net. At the same time if GDP growth can be accelerated tax revenues will increase and thereby the budget deficit reduced. Thus unlike the IMF approach of reducing the budget deficit through economic contraction, the same objective of fiscal stabilization can be achieved through growth.

Let us indicate the main features of a budget design based on the principle of stabilization with growth. Stimulating growth requires increasing development expenditure from the present abysmal low of less than 2 percent of GDP to the historical trend level of 7 percent. Furthermore the development expenditure would need to focus on projects that generate employment and have large secondary multiplier effects that induce private sector investment.

The projects that meet these strategic criteria include infrastructure projects such as power generation as well as roads and railways that link Pakistan with Central Asia on the one hand and South Asia on the other. Regional economic integration to the north and east of Pakistan can reap rich benefits for the people of Pakistan. Apart from this programs need to be launched to improve irrigation efficiencies. These should aim to not only bring more water to the farmers but enable its efficient utilization to maximize GDP per unit of water use. To enable the increasingly young labour force to contribute to productivity increase and economic growth, skill training programs need to be launched, the coverage and quality of school education increased, research based teaching developed in the higher education sector and the coverage and quality of health care improved.

If the fiscal space for such development expenditures is to be created, four policy initiatives are required: first, the Rs. 400 billion being currently spent by the government annually to finance the losses of public sector entities can be saved by restructuring and privatizing them. Second, the Rs. 450 billion currently locked up in government commodity trading can be largely saved by leaving commodity trading to the private sector. However the government needs to build strategic reserves of wheat to deal with unforeseen production shortfalls. Third across the board subsidies and arbitrary SROs that distort the private sector incentive structure should be withdrawn. This will save hundreds of billions of Rupees and also induce economic efficiency. Crucial subsidies on food and electrical power should be targeted to the intended beneficiaries rather then spread across the entire population.

In designing the budget due consideration should be given to the existing precarious balance of payments situation. State bank reserves are down to about USD 7 billion which covers only 1.5 months of imports. Actually 3 months import coverage is considered safe. It also means that ceteris paribus Pakistan will not be able to make the payment of USD 5 billion to the IMF that is due over the next year. This loan repayment will have to be rescheduled and additionally another USD 4 billion injected into the State bank.
This is the time to set sail for a better future for Pakistan but we need to carefully navigate through the rough waters that lie immediately ahead.   


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