Pakistan’s defence budget will come under scrutiny in any future arrangement with the International Monetary Fund, as it will be difficult for the IMF to present a case in its board where defence spending is higher than development expenses, says a former IMF official.
Giving a lecture on ‘the IMF and Pakistan, a road to nowhere’, Dr Meekal Ahmed, former senior adviser to IMF executive director, said in Pakistan’s present security environment, the IMF stayed away from suggesting cuts in defence spending (under the previous $11.3 billion programme). The lecture was arranged by Pakistan Institute of Development Economics.
Ahmed’s comments came in the midst of reports that Pakistan and the IMF have been secretly negotiating a new programme as the country’s external financial position has deteriorated significantly. In 11 months of the outgoing fiscal year, the current account deficit – the gap between external receipts and payments – widened to $3.7 billion, $2.3 billion higher than original estimate for the whole year.
Ahmed said in any future programme the IMF will focus on cutting spending, particularly on defence, which must fall as a percentage of total size of economy over time. How the IMF staff will present a programme to their board when defence spending is higher than development spending, he asked.
For the next year, the defence budget has been set at Rs545 billion, which is 2.4% of GDP but actual spending is expected to be Rs913 billion or 3.9% of GDP. Contrary to that, Rs360 billion has been earmarked for development budget.
“No country turns to the Fund when its economy is doing well. We need to reflect on why we are unable to get out of their clutches and stay out like other successful developing countries have done.”
He said programme ownership is a critical ingredient in successful implementation, adding the early end of the last programme was a collective failure and the result of lack of ownership. Failure to impose reformed GST was last nail in the coffin of the IMF programme, he commented.
The 25-month arrangement for $11.3 billion loan ended prematurely in May 2011 as the government failed to push through key reforms.
No fresh funds
Former State Bank of Pakistan governor Shahid Kardar, while presiding over the lecture, said the IMF will not offer fresh funds in the next programme. Rather, it will prefer to roll over outstanding debt and enter into a formal arrangement only after Pakistan takes certain prior steps like application of reformed GST.
Kardar believed that the next programme will be tough and this time Pakistan may not have US support.
Stressing the need for undertaking reforms, Kardar said there was no constituency for reforms in the country. “Bureaucracy will not bother as their salaries have doubled since 2008 despite difficult times. Farmers do not want to pay tax but are receiving subsidy on imported fertiliser and the business community will never like to have reformed GST,” he elaborated.
“We are holding guns to our heads and saying to the world give us money, otherwise, we will blow ourselves,” said Kardar.
To a question about the timing of the next IMF programme, Kardar said a lot will depend on how oil prices move in the international market. Pakistan’s biggest worry should not be the size of current account deficit, but the real issue is financing the deficit, he said.
However, he suspected that the IMF will negotiate the loan programme with an interim government.
Published In The Express Tribune, June 21st, 2012.
COMMENTS (15)
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Another suggestion missed by many. Why not we mention reducing administrative expenditure. If you can not enhance your income, cut down your expenses..And what about reducing corruption and return of Pakistani money back to the country from foreign banks..
@Bemused:
That is fine as far as I am concerned! But I will call Shahid who I have known for 40 years and who is a close friend of mone and rag him about it!
@What the ......?: I did not retire from the IMF TEN years ago.
Actually, I did not retire. If you work on the Executive Board, there is no retirement age. That only applies to staff and I was NOT IMF staff.
I LEFT the IMF for reasons that I need not go into here.
And so what if Shahid Kardar lasted only 6 months as Governor? Does his barin-freeze after that?
These are purile and stupid comments.
Free electricity, cheap transportation, free water, Cheaper Petrol, No income tax, No Sales Tax, high Defense budget- You pay now or pay later. Later is here. It’s (still) the economy stupid. ZAB said we rather eat grass. Time to eat grass has arrived.
“We are holding guns to our heads and saying to the world give us money, otherwise, we will blow ourselves,” said Kardar.
Surely he means 'blow ourselves UP'?
ET: Why if lecture was given by Dr Meekal is there huge photo of Shahid Kardar?
Wise words indeed from an ex-IMF official who retired 10 years ago and a former SBP Governor who lasted 6 months!
De fence budget should be curtailed down for the prosperity of the country and the poor people,
Pakistani Defence Plans are built against Indian Attack Capability and not against Indian attack intentions.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From an indian perspective the erosion of Pakistan thru their disproportional spending on defense is a welcome outcome.
'We are holding guns to our heads and saying to the world give us money, otherwise, we will blow ourselves.” What is stopping you.
Why would India attack Pakistan, or why would anyone in their true senses attack Pakistan. There is nothing in Pakistan worth invading, plus India already has enough headaches of its own. Believe me, most Indians are glad that India was partitioned in 1947 and would be loathe to undo it.
Jinnah did the greatest service to India by creating Pakistan
@ayesha well said we need to cut our defence budget by half. India will never attack us.
"For the next year, the defence budget has been set at Rs545 billion, which is 2.4% of GDP but actual spending is expected to be Rs913 billion or 3.9% of GDP. Contrary to that, Rs360 billion has been earmarked for development budget."
3.9% of GDP does not seem too bad until you consider the fact that Pakistan's tax to GDP ratio is less than 9%. Usually people compare India's true defence to GDP raio 2.5% with Pakistan's understated defence to GDP ratio - 2.4% and say these are comparable. But when you take into account tax to GDP ratio in both countries AND the true defence expense, India spends less than 20% of its tax revenues on defense and Pakistan spends greater than 40%.
Excellent. This should have been done long back. Pakistan would have been forced to review their revisionist foreign policy and security policy vis-avis India and fund a defense department that can defend Pakistan rather than atack India. Citizens of both countries could have benefitted by less money spent on defense and more on welfare of people. Better late than never.
How dare IMF refuse to give us money! We have a right to defend ourselves......but we refuse to pay our taxes!