A fiscal stimulus in 2011-12?

One of Pakistan’s fiscal economists recently said something which made me uneasy. He said, quite correctly, that there is no room for a ‘pro-growth’ fiscal stimulus in the forthcoming budget. The present fiscal year 2010-11, is likely to end with a fiscal deficit of around six per cent of GDP against the government’s original target of four per cent of GDP. However, this is the narrow concept of the ‘consolidated’ (federal plus provincial) budget deficit. To arrive at a truer measure of fiscal pressures, we should add the so-called ‘quasi-fiscal’ deficits of public enterprises. It would not surprise me if these quasi-fiscal deficits add up to 2-2.5 per cent of GDP. Thus, the Public Sector Borrowing Requirement (PSBR) is about 8-8.5 per cent of GDP.

Given such a weak starting position, it should be obvious that there is no scope for an expansionary fiscal stance to, as we like to say, ‘jump-start’ the economy. During the last global crisis (2008-09), many countries, including India and China, were favourably placed in terms of strong starting fiscal positions. Pakistan was — no surprises here — in as weak a position then, as we are in now. While adverse exogenous global price developments helped swell our internal and external deficits to about eight per cent of GDP each in 2008, the tipping point for the economy came with the unwinding of the lags between policy action and outcomes emanating from the highly expansionary policies of the previous government. With aggregated demand, especially consumption and imports, racing ahead of the economy’s aggregate supply potential, and only tentative attempts to slow its torrid pace, while inflation rose to 27 per cent, the economy’s headlong rush towards another balance of payments crisis with speculative asset price bubbles popping along the way, was preordained.

With no wiggle room again, Pakistan’s forthcoming budget needs to be credibly tight. On that point, I agree with my economist friend. However, what surprised me was his implicit view that the government should take a lead role in fostering growth in the economy. Here, I disagree. Growth must come from the private sector. Not from the 90-year-old geriatrics who have thrived on government patronage and the connivance of the Federal Board of Revenue for 62 years, but from their more dynamic offspring and new entrants. The government should focus on providing an enabling environment by, inter alia, refining its regulatory framework, removing bottlenecks to new investment including barriers to entry, improving the functioning of markets and building confidence. Of course, the government must invest in development which focuses on providing essential physical and social infrastructure and generates positive externalities. But a public sector-led growth stimulus at this juncture would not only make the pre-emption of resources by the public sector worse, it would ‘crowd-out’ the private sector by denying it credit, keep market interest rates high, increase borrowing requirements and debt and add to inflationary pressures.

As the 2011-12 budget draws to a close, all sorts of fiscal ‘experts’ will come forward to offer their insights. We should welcome this, provided it is more than posturing, pandering to special interests and grandstanding. Much has been made of the recent meeting of the high-priests of business — the Pakistan Business Council (PBC) — with our ‘awam dost’. It is said that this is an unprecedented development and that may be so. But it was deeply disappointing to note that the PBC made absolutely no mention of the RGST. It is unfathomable why they would be silent about it, preferring to continue with the moth-eaten and fractured GST. Perhaps they have become so expert in milking it, that starting anew with the RGST will be a costly nuisance? Or maybe they don’t want to forego the 750-odd exemptions and concessions they presently enjoy?

Pakistan no longer has the luxury of ducking its daunting economic agenda. Time is running out since the 2011-12 budget is the last one which offers an opportunity to set our economic house in order. The following year will be an election-year budget and our past experience with election year budgets is not reassuring. If there is to be a fiscal ‘giveaway’ in a pre-election year, it would surely be better to have a starting position that is strong and affords room for some easing of policies while still maintaining a reasonably prudent macroeconomic framework.

Published in The Express Tribune, May 10^th, 2011.