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Pakistan’s high defence spending to come under spotlight

The IMF will find it difficult to lend to Pakistan since it is spending more on defence than on development. There is also no constituency for economic reforms, which IMF always insists. So, what Pakistan is doing by turning to IMF, is no more than holding a gun to its head threatening to blow up if no money is given.

POREG VIEW:

It is difficult to disagree with Express Tribune’s report that Pakistan’s high defence spending will come under IMF spot light as negotiations begin for a fresh bail out. On its part, the IMF will find it difficult to lend to avert a balance of payments crisis when Pakistan’s defence spending is higher than its development expenses.

The current account deficit – the gap between external receipts and payments – widened to $3.7 billion in the eleven-months of the outgoing fiscal year. This was $2.3 billion higher than original estimate for the whole year.

According to Dr Meekal Ahmed, a former senior adviser to IMF executive director, the global lender did not suggest cuts in defence spending under its previous $11.3 billion programme because of the prevailing security environment then. Now it will be a different story since Pakistan’s anti- terrorism plank has considerably eroded with its main prop, the United States itself withholding development aid in order to force Islamabad to fall in-line.

For the next fiscal year, defence budget has been allocated Rs 545 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, Dr Meekal Ahmed lamented while speaking at Pakistan Institute of Development Economics. Significantly, his lecture was titled ‘The IMF and Pakistan, a road to nowhere’

Pakistan failed to implement the conditions that were attached to the earlier $ 11.3 billion loan. And the 25-month arrangement ended prematurely in May 2011. One of the key conditions was reforms in General Sales Tax. This was not done, and this failure was ‘last nail in the coffin of the IMF programme’, the learned economist commented.

Ahmed’s comments appear like reality check amidst reports that Pakistan and the IMF have been secretly negotiating a new standby loan. No country turns to the Fund when its economy is doing well. It is time Pakistan leadership and people coolly reflect why their country is unable to get out of the IMF clutches, like several least developed countries.

Pakistan’s public debt to GDP ratio is expected to reach 59.3 per cent by the end of this month. It means the health of Pakistan economy is entering the ICU zone.   Over 80 per cent of the debt crisis at the international level came at a debt-to-GDP ratio of less than 60 per cent.

Pakistan’s huge debt and liabilities reached Rs12.1 trillion in fiscal year 2011. Four years ago, the public debt was just Rs6.055 trillion. At present these loan repayments consume 43.7 per cent of the government revenue.

Pakistan’s public debt to government revenue ratio is no less alarming. It has reached 474 per cent according to the country’s Planning Commission.

According to Auditor General of Pakistan, the statutory auditor, the country’s public finances are dominated by low and stagnant tax to GDP ratio, low development spending, and borrowing from banking system which resulted in hyper-inflation, slow economic growth and widespread exchange losses in public debt portfolio.

The economy is on the path of a downward spiral; there is no sings of recovery. Slow economic and export growth, cuts on development spending, energy shortage, pressures on IMF loan repayments and the biggest challenge of financing the current account deficit put the economy in ‘royal trouble’.

The absence of a well defined, functional, professional and dedicated debt management office is compounding Pakistan’s miseries with government crowding out private borrowings.

It is no surprise therefore that a view is gaining currency that the IMF may not offer fresh loans and instead may roll over outstanding debt with some tough conditions. This vies is shared by many economists. If IMF adopts such a prescription it will be bad news for the political leadership which is getting ready for elections either this year end or early next year.

As Shahid Kardar, a former governor Pakistan’s apex bank and himself a noted economist, says, there is 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 fertilizer and the business community will never like to have reformed GST.

So, what Pakistan is doing by turning to IMF, is no more than holding a gun to its head threatening to blow up if no money is given. 

—MALLADI

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