Cut in PSDP may teach them a valuable lesson

Thursday, 28 January 2010 11:22

EDITORIAL : According to a Business Recorderexclusive, the government is considering slashing Public Sector Development Programme (PSDP) 2009-10 by 50 percent. The mere size of the reduction is highly significant and reflects the obvious fact that the government either overstated its revenue generation capacity, both from local and foreign sources, or overstated its PSDP with the objective of playing to the gallery at the time of the budget announcement.

After nearly seven months into the current fiscal year, it has become patently evident that the government has failed to not only to realize its tax revenue target, but also its considerable optimism in terms of the likelihood of the disbursement of the 41 billion rupees Tokyo pledges made in April of 2009 was misplaced.

The failure of the Federal Board of Revenue (FBR) to realize its tax targets is partly attributable to a decline in productivity which, in turn, is due to massive loadshedding, as well as a decline in the international orders for our exports as a consequence of the global recession.

The blame for continued loadshedding, the second year in a row, has to be laid at the doorstep of the present government since it has failed to eliminate the serious menace of inter-circular debt, acknowledged as a major cause of concern as early as in November 2008 and admitted as such by the government in its Letter of Intent (LoI), submitted to the International Monetary Fund.

Thus productivity in this country continues to be held hostage to a flawed energy policy, in which the Ministry of Water and Power as well as the Ministry of Finance are complicit, since the resolution of the inter-circular debt lies with the Finance Ministry.

Additionally, the FBR continues to struggle to bring the rich into the tax net, through ending exemptions as well as issuing notices to the non-filers, a struggle unlikely to bear fruit until and unless the parliamentarians are completely on board. However, it must be acknowledged that the FBR has undertaken reforms and the World Bank remains engaged in providing guidance in this regard.

The latest LoI, submitted by the government to the IMF in December of 2009, notes that the Tokyo pledges remain elusive. In this context it is hoped that the government changes its economic direction and dramatically reduces its budgetary reliance on foreign assistance. One would also hope that the government, in future, focuses on reducing current expenditure, as opposed to PSDP, in the event of a reduced collection of revenue, in comparison to that envisaged at the start of the year.

As mentioned earlier, the government also overstated the PSDP with a view to playing to the gallery than exercising real influence on economic matters or challenges. This explains the 54 percent rise in government budgetary allocation for PSDP in one year - a target that was always unlikely to be met as the year was expected to be difficult for the economy marked by loadshedding and global recession.

It is significant to note that slashing PSDP by 50 percent would imply a total allocation of 323 billion rupees, 95.9 billion rupees less than the revised estimates of 2008-09, and represents an amount lower by 42 billion rupees, compared to what was allocated four years ago in 2005-06, when the rupee-dollar parity was around 60 rupees to a dollar, instead of the current 86 rupees to a dollar.

Thus the government has been found guilty of both transgressions with respect to its economic policy, reflected in the budget, namely overstating revenue and the PSDP expenditure for the current fiscal year. While most governments may indulge in such an exercise by maintaining that it is erring on the side of optimism, a legitimate factor in economics, as perception, plays a strong role in turning the economy around, yet the scale of the optimism must be tempered to what is realistic.

The budget document for 2009-10 was unrealistic and was considered as such by economists, based on the level of optimism considered realistic. It is hoped that the Ministry of Finance has learnt a valuable lesson this year and provides more realistic assessments in future.