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Thursday, August 26, 2010

Why not begin by tightening your own belt......

The international donors have shown unprecedented generosity in offering credit to Pakistan to meet the expenses related to rescue, rehabilitation and reconstruction in the wake of Pakistan's devastating floods. World Bank has offered $ 1 billion and ADB has been even more generous to offer $ 2 billion. But the real question to ask ourselves is whether Pakistan should accept the offers and increase its external loans portfolio which is already at $55 billions. According to some experts, even this amount of external loans is not sustainable for a country which has no hope of any economic growth and which is totally unsure of meeting its fiscal targets.

In this situation, will it not be financially prudent to tighten our own belt first and tap internal resources before asking for external loans. An interesting analysis made by a member of Musharraf’s economic management team has appeared in a recent issue of The News in which he has raised certain questions like; are we doing enough to help ourselves? Are we really short of resources to address the challenges of rehabilitation and reconstruction? Should Pakistan accept loans from international institutions? Has our debt carrying capacity improved or deteriorated in recent years? 

Pakistan's public debt which stood at Rs4814 billion in June 2007, increased to Rs8913 billion by June 2010. In other words, we added Rs4099 billion debt in just three years. Similarly, external debt which stood at $40.3 billion in June 2007 rose to $55.6 billion in June 2010--an addition of $15.3 billion in three years. As a result of unrestrained borrowing in the last 2-3 years, debt servicing alone consumed over 48 per cent of total revenue – up from 35 per cent in 2007.
Given the horrifying state of debt, should we accept the loan offer of WB, ADB and bilateral countries amounting to billions of dollars? Do we need external assistance for flood-hit areas? As a matter of fact,
Pakistan has enough resources available in the budget 2010-11 which can easily be utilized for the purpose at hand.

The government has allocated Rs.124 billion under 'other development expenditures' which includes Rs.50 billion for the Benazir Income Support Program (BISP) and Rs.45 billion for Internally Displaced People (IDPs). The allocations for BISP and IDPs are meant for the poor and displaced persons, hence Rs95 billion can easily be diverted for flood victims. The government has also allocated Rs30 billion under the "Special Program" which includes the People's Works Program I and II. These can also be diverted for the same purpose. Thus, Rs125 billion is available from the federal budget for flood victims.

Provincial governments can also divert Rs173 billion from their provincial PSDP. The federal PSDP has already been slashed from Rs421 billion last year to Rs280 billion this year – a reduction of 33.5 per cent. On the contrary, the provincial PSDP surged from Rs200 billion to Rs373 billion in the same period, showing an increase of 86.5 per cent. This is the height of financial indiscipline on the part of provincial governments. How can PSDP be increased to such an extent when the country is passing through the most difficult period of its economic history? It appears that the provincial political leadership is totally oblivious to the gravity of the situation.

The analysis goes on to suggest that for the provincial governments, one way to correct their exaggerated budgets is to freeze their PSDP at last year's level, that is, zero growth as apposed to a reduction in federal PSDP by 33.5 per cent. In doing so, the provincial governments can divert Rs173 billion for flood-affectees. By postponing the implementation of the irrational increase in the salary of the government servants, the provincial governments can also save several billions which can be utilized for flood-affectees.

Thus, federal and provincial governments together can divert Rs300 billion from the existing budget for the flood affected people. Postponing the implementation of the pay hike would release additional resources for the purpose. We are not short of resources. What is lacking is the will of the political leadership to tighten their belt. They don't want to disturb the allocations which would 'benefit' them. It is for this reason that they are further cutting the PSDP and are eager to borrow more resources from the international institutions to finance flood-related expenditures. The international financial institutions must study the debt-carrying capacity of the country before committing billions of dollars.

Pakistan is already a highly indebted country and additional lending for flood affectees would further aggravate the debt situation. As discussed above, Pakistan can easily mobilize over Rs300 billion or $3.5 billion in the current fiscal year from the existing budget. Give Pakistan a chance to become a fiscally responsible nation. Allow it to mobilize its own resources first and tighten its own belt. If there was a need for additional resources Pakistan would certainly turn to the WB and the ADB but at the moment the calculation suggests that Pakistan does not require additional billions of dollars.The government must not seek additional loan from any quarter. We must encourage grant assistance and discourage even a soft loan. Pakistan has no capacity to carry more debt. We should say No with thanks to the international financial institutions. This is the time to reallocate resources from the existing budget. This is not the time to further cut the PSDP from already depleted level. We must learn to live as a proud nation and face the challenges boldly. 

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