But freezing these expenditures alone is not enough as the inefficiencies and leakages of public sector white elephants continue to put excessive pressure on the fiscally constrained government.
Can you shutdown PIA, Railways or PEPCO? A big NO. Well, privatisation is one option, but the federal budget remained mute on it. But the government ought to do something to cement the leakages that have mounted to 1.5 percent of GDP.
Pakistan economic survey revealed that a cabinet committee on restructuring (CCoR) has been formed to restructure entities including PIA, PEPCO, Railways, TCP, USC, PSM and NHA with an objective to make these PSEs profitable, self-sustaining ventures under public private partnerships.
Only time will tell the efficacy of CCoR or whether another committee would be formed to push the existing committee. Nonetheless within a week after budget announcement, Prime Minister approved a Rs12 billion bailout package to rescue Pakistan Steel Mills.
Can this rescue package take PSM out of woods? Well, the populist nature of the government which has compelled even non-public organisations including large banks to make permanent the kicked out workers recruited in 90s with reimbursement of salaries and perks for the time they were out of the organisation says little in this regard.
Recent government's history of bias towards PSEs, especially, PIA employees, suggests that these committees and bailout packages are prone to corruption and inefficiencies, rather than attaining the objectives stated in the Economic Survey.
Expenditure on general public service, which is estimated to increase by a quarter over budgeted amount in the outgoing year can be restricted to a lower level in the upcoming year. It's easy to budget it, but history suggests it's hard to comply on promises.
Last year, the then advisor on Finance, Shaukat Tarin said that in 2010-11, agriculture income tax will only remain exempted over his dead body. Will Dr. Shaikh follow the path of his forerunner on not fulfilling the promise of freezing the current expenditure or will he be able to comply is, is yet to be seen, with time being the best judge.
The enormous pressure from the halls of power on economic managers is visible from a long resignation list. First it was Tarin, followed by Governor SBP, Principal Economic Advisor Sakib Sherani, commissioner SECP among few others.
Current set-up took a full year relaxation from the country's prime lender IMF to implement VAT, yet it could not come up with a consensus within its own party's province. Sindh government's tone to implement GST on services from October suggests that VAT implementation may be replaced by other taxes to satisfy IMF.
One percent raise in GST is showing the intentions. Economic studies suggest that world over, especially in third world countries, GST over 10 percent is prone to corruption. With Pakistan at 42 level of corruption according to Corruption Perception Index of Transparency International, increase in revenues may not be as desired.
With a 16 percent higher outlay from revised estimates on defence, the task to keep the current expenditure within Rs2 trillion will be a daunting one for the fiscal managers. Mind you, even doing so, wage spiral inflation (owing to revised wages and its impact on provinces and other sectors) and higher GST inflationary impact might still hinder money managers to ease interest rates.
MONEY AGGREGATES:
After sharply increasing by Rs61 billion in the first two weeks of May, currency in circulation declined by Rs25 billion in the last two weeks as Rs18 billion reverted to the system for the week ending May 28. Although money is coming back to system, farm economy continued to heat as credit raised by commodity operations was at Rs19 billion for the last week, taking the toll for past five weeks to Rs109 billion.
With a reversal in net foreign assets, although not by much, government pounced upon the opportunity to retire some of its excess funding from central bank. With slashing Rs30 billion to SBP, fiscal managers ought to reduce the credit by another Rs150-170 billion by end of June to comply with IMF's ceiling condition.
Nonetheless, Rs11 billion fiscal borrowing from scheduled banks and Rs19 billion quasi fiscal operations left nothing for private sector to rejoice as its credit size shrunk by Rs13 billion.
With commodity operations money coming back to system the demand and time liabilities of banks increased by Rs32 billion for the week ending May 28. This made the money supply inch up by Rs15 billion or 0.29 percent. (Feedback at [email protected])
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KEY MONETARY AGGREGATES AS ON MAY 28
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Rs (mn)
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28-May 21-May Change
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Currency in Circulation 165,789 183,337 (17,548)
Total Demand & Time Deposits 303,929 271,221 32,708
Broad Money (M2) 470,777 455,795 14,982
NFA 79,609 72,176 7,433
NDA 391,169 383,620 7,549
Net Government Borrowing 430,845 430,337 508
Borrowing for budgetary support 378,759 397,595 (18,836)
from SBP 142,579 172,698 (30,119)
from scheduled banks 236,180 224,897 11,283
Commodity operation 53,024 33,702 19,322
Credit to non-govt sector 172,339 178,500 (6,161)
to private sector 102,530 115,510 (12,980)
to PSEs 68,942 62,112 6,830
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Source: SBP
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