The new year brings fresh challenges for the government, especially since decision-making traditionally alters in Islamabad as elections draw near. Given the present situation, the government’s options are limited. The fiscal deficit is still pretty high and budgeted earning and revenue targets look suspect. The Coalition Support Fund is compromised, putting additional upward pressure on fiscal liabilities. Abandoning the IMF program has distanced other multi- and bi-lateral donors for whom the Fund’s posture is a litmus test for lending. And estranged relations with the US and nato mean further rollback of crucial aid. Hence the pressure on the current account will be tremendous.
Now, if this is to be the election year, the political government must make sure its organs do not indulge in irresponsible expenditure, or the situation will get completely out of control. If the practice of money printing picks up any more pace, there will be added pressure on deficits, jacking up inflation, straining the balance of payments, weakening the rupee and diluting foreign exchange reserves.
At this juncture, the government is well advised to exercise fiscal prudence by cutting expenditure and adopting official austerity measures that have already been approved. It must also urgently improve management and efficiency of all public sector enterprises, especially since their privatisation is off the shelf, at least for now. They are an immense drain on the government’s fiscal position, and leave little elbow room, which will be troubling in the election environment. Present times also require the government to think out of the box and initiate prudent debt management techniques through asset management and sales. It is a great challenge, but the fiscal deficit should be managed between the 4-6 per cent range.
Continuing the momentum on improved tax collection is critical. The 27 per cent improvement over last year is appreciated. Now, FBR reforms need to be pushed through with greater force, while closing policy loopholes, to build on the success, because there is little fat left to chew on. And while progress on agriculture tax is too much to ask for in election year, tax collection gains need to be protected. They will play a crucial role in easing the government’s fiscal burden.
The balance of payments position is not much rosier. The trade gap is widening with exports not only held hostage to growth slowdown in our main export markets, but also the unfortunate incidence of cotton prices crashing in the international market. Presently, they are at their lowest level in two years, far from last year’s scenario when commodity price hike prompted larger than usual trade inflows. Also, shortage of gas and electricity has crippled industry, with a pronounced impact on exports. At this time, spending on imports needs to be curtailed. Concerned quarters much ensure import of luxury items is checked. It will be important now to shift focus to bolstering remittances. We started actively promoting remittance inflows in ’09, and now they have increased to approximately $12 billion. There is still capacity to raise this number to the $12-13 billion tune over the next 12 months if correct policy decisions are taken.
Considering how election year policy making invariably involves more-than-usual expenses, the need to plug unnecessary leakages, while building on the narrow earning base, cannot be stressed enough. Yet it is also in such environment that people-friendly policies are framed. The government has a difficult juggling game ahead of it. But at the cost of repetition, without exercising austerity and prudence, it will have to wriggle hard to avoid the axe.
The writer is a former finance minister
