Pakistan's budget ignores major economic problems

The 2007 Federal Budget is a consumption-oriented budget that threatens to worsen inflation and poverty in Pakistan. The biggest burden on the Pakistani people is the spiralling inflation which has eroded the standards of living. The budget relies on utility stores and food subsidies to control prices. This is too little to stem the tide of rising prices.

The military regime's intention to make essential items available at utility stores by adopting the previous Pakistan People's Party (PPP) plan for utility stores fails to appreciate that this can only succeed when other aspects of the economy are also addressed. Similarly, offering subsidies on essential agricultural produce is a temporary arrangement which could end up distorting incentives for production.

To cure a patient the disease must be diagnosed. The disease of surging prices lies in consumption-oriented policies, excess liquidity, lower growth of essential agricultural crops, supply-side inefficiencies and growing cartelisation of the economy. The budget completely ignores these fundamental issues that lie at the heart of persistent inflation.

Welcome step

The relief provided to civil servants in the guise of promotions and pay raise is a welcome step, but it has no relevance for the factory workers, the self-employed, the informal labour and other people of limited means. The Public Sector Development Programme (PSDP) has received a hefty allocation of Rs520 billion but if the past is any test, this amount is unlikely to be spent. It is well-known that the PSDP allocation announced last year spent one third less than the amounts allocated to it last year.

There is no fundamental change in budgetary priorities, especially in aiming to reduce non-development expenditures. Defence allocations have been raised without introducing any accompanying system of accountability. Pakistan's people have the right to ask if their hard-earned resources are being spent on building real estate empires for Generals or on strengthening defence capability.

While the people support a strong defence for the country, this could only be achieved by ensuring that every penny spent on the armed forces is accountable to the people. While higher inflation is hurting the poor most directly, it is also compromising the general economic health of the country. In recent years, runaway inflation has increased the cost of production, thereby reducing the overall competitiveness of our export sector. This is clearly manifested in a worrying decline in exports and a record current account deficit witnessed this year. The textile sector is facing tremendous problems in coping with the new global realities after the expiration of the Multi-Fibre Arrangement. A continuous increase in the cost of production is complicating matters for the textile sector.

Despite the continuous influx of easy money - through remittances and foreign aid disbursements - the Musharaf regime has added to the burden of foreign debt by more than one billion dollars. This is in addition to the significant increase in levels of domestic debt. Such a strong injection of liquidity has fuelled over-consumption, spiralled inflation and raised the cost of production for manufacturing sector.

Both bilateral and multilateral aid flows to Pakistan have significantly increased during the previous years, but there is limited information as to how and where these aid flows are being used? The country needs to know where massive aid flows that Pakistan received were spent. The regime's claims of achieving a high investment to GDP (gross domestic product) ratio do not pass the test of scrutiny. Much of the increase in investment to GDP ratio comes from higher investments in construction and services sectors.

Manufacturing

There is no significant increase in manufacturing sector investment. In fact, growth of manufacturing firms fell short of target by two percentage points (8.4 per cent as opposed to 11 per cent). Revival of manufacturing activity is the key to creating job opportunities and reducing poverty. The manufacturing sector remains weak, struggling to survive in the faced of cheaper Chinese imports.

The claims that foreign direct investment has increased are also spurious.

The private direct investment has been for the purchase of privatised units and not for investment in new projects that can create new jobs. This private sector investment has not added any new industrial capacity to the country. This regime has rushed through a non-transparent and half-baked privatisation process that has caused loss to the national treasury as well as led to loss of jobs for labour. Economic historians will look back at this regime's privatisation as the biggest scam of the military regime.

The current regime has mismanaged privatisation like Russian oligarchs. Important national assets were sold at throw away prices. Exact details of the privatisation contracts were never made public and there were important procedural irregularities. The electricity crisis in Karachi is one fallout of the half baked privitisation process. Karachi Electric Supply Corporation (KESC) was sold to a group that had no experience in running electricity utilities.

Back in the 1990s the government of Pakistan People's Party made substantial investments in KESC and had arrested the power crisis in Karachi. Now the thoughtless privatisation of KESC has wreaked havoc with the electricity infrastructure in Pakistan 's commercial metropolis.

The regime claims that it has achieved high economic growth but this is another public relations gimmick. Growth cannot be sustained when inflation cripples purchasing power for the poor, exports are declining, current account deficit is widening and external debt is accumulating. More importantly, this government has ignored the physical infrastructure necessary for sustaining growth.

The long power shutdowns and loadshedding is undermining the Pakistani economy. It is ironic that a government that prides itself on achieving seven per cent growth rate has failed to add any significant capacity to electricity generation. No new power project has been built during the past seven years of General Musharraf's rule. Similarly, no significant investments in the water infrastructure have been made, which will compromise growth prospects of our agriculture.

Overall, the 2007 budget is a major disappointment for the nation. It does nothing to change the priorities of the rulers and only reinforces failure - in controlling inflation, in reducing current account deficit and in reducing mass poverty.

It can simply be seen as a continuation of the inegalitarian economic policies of the last seven years of dictatorship.

The writer is the Chairperson of Pakistan People's Party and a former Prime Minister of Pakistan.