Beware.... PIGS is coming to visit us this fall.....

The provincial governments in Pakistan are proving themselves to be totally irresponsible by presenting deficit budgets in spite of massive resources being transferred to the provinces after NFC Award. In an article published in The News, a member of Musharraf’s economic team has painted doomsday scenario for the present economy. According to him, (a) Shaukat Tarin has drowned the country in debt; (b) Pakistan will face serious economic crunch if VAT or modified GST is not implemented from October 1, 2010; and (c) presenting a deficit budget by provincial governments in the midst of massive resource transfer to them is nothing but the height of financial indiscipline. According to the article, seeking over $11 billion assistance from the IMF against the advice of senior government officials was a great mistake. He should have realized that these amounts would have to be returned to the IMF in the next 3 to 4 years.

Referring to officially documented figures, the article states that: "In the last decade, Pakistan's economy witnessed a major economic transformation. The country's real GDP increased from $60 billion in 2000-01 to $170 billion in 2007-08, with per capita income rising from under $500 to over $1000. During the same period, the volume of international trade increased from about $20 billion to nearly $60 billion. For most of this period, real GDP grew at more than 7 per cent a year with relative price stability. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output growth, low inflation, and the government's social policies contributed to a reduction in poverty and an improvement in many social indicators."

Value Added Tax (VAT) has become a highly misunderstood tax. The general perception created by its opponents is that it is highly inflationary, will increase the tax burden on poor consumers; and business would be adversely affected. Lack of effective communication with the stakeholders and general public has led to the building up of these misperceptions. The detractors have received political support as all the major political parties have taken a firm stand to oppose VAT. The political parties do not want to lose their vote bank of business and traders' community. But if Pakistan does not implement VAT or modified GST on October 1, 2010, it will face serious economic consequences.

The IMF will not release its next tranche; the World Bank and ADB would stop lending and PakistanPakistan to become a bankrupt state by December 2010; or we implement VAT and take the economy out of the current crisis in the next 2-3 years. may not receive money from the Kerry-Lugar Act. We have two options: either we continue to play politics with VAT and allow

Third, by presenting the first provincial budgets after the new NFC Award, the provinces have shown how fiscally irresponsible they could be. Presenting a deficit or even a balanced budget in the midst of massive transfer of resources from the center is nothing but the height of financial indiscipline. By doing so, the provincial governments have sowed the seeds of perpetual macroeconomic crises, rising debt burden, slower economic growth, unemployment and poverty.

By presenting deficit budget the provincial governments have already created serious financial difficulties for the country. Pakistan will begin its new fiscal year (2010-11) with a targeted budget deficit of Rs923 billion or 5.4 per cent of GDP. If slippages on revenue and expenditures were added, this deficit would rise to over Rs1100 billion or 6.5 per cent of GDP. How will the government finance such a large deficit?

Provincial governments are totally oblivious to the dangerous developments taking place on Pakistan's financial scene. The chief ministers must note that Pakistan will be negotiating a new IMF program in October/November 2010. This program will be in line with the PIGS (Portugal, Iceland, Greece, and Spain) model in which austerity measures will be the key conditionality. Restructuring of PSEs including laying off thousands of non-productive workers, elimination of power subsidies and many expenditure reduction measures will be the necessary part of the new program.