One trillion rupees is the total amount allocated under the Public Sector Development Programme (PSDP) in the recently announced federal budget for 2017-18. PSDP fund is the government’s primary tool to provide for development projects and programmes. In other words, PSDP is the main instrument at the disposal of the government to woo voters before going into general election next year.
This year’s allocation for PSDP is highest in Pakistan’s history. The reason for this is the next year’s general election and references to the PSDP allocation will be a regular feature in PML-N’s election campaign. One can expect that every major economic decision by the government in the run-up to a general election is influenced by electoral considerations. For the next 12 months, Pakistan’s economy will be an election economy.
This practice is not specific to Pakistan. It has become customary for ruling parties to bestow hefty economic favours before going into elections. PML-N government has also announced economic relief packages for different sectors of the economy with the same intention. Such relief packages incorporate various incentives and exemptions for economic agents.
These measures do impact the economy in a positive way but their long run repercussions more than overcome the short-lived positive benefits. Part of the reason for this is the short-term nature of these incentives. In most of these cases, the exemptions and incentives are withdrawn after elections. This practice distorts the economic decisions made by consumers and producers. In most of the cases, the impacts of such policies which are marked by election considerations bear negative effects on the economy in the long run.
A classic example of this is the current government’s exchange rate policy. The exchange rate of rupee for dollar has been somewhat stable under this government. It has moved within the narrow band of 101-104 for the last two years. Prominent economists have repeatedly emphasised that the rupee exchange rate is over-valued. Even Pakistan’s creditor-in-chief, the International Monetary Fund (IMF), has insisted in its periodic reviews of Pakistan’s economy that rupee exchange rate is over-valued by as much as 20 percent. This policy choice is directly related to election politics. Rupee stability is seen as a symbol of economic achievement in Pakistani politics. Even the Pakistani population views it as such. Politicians hurl attacks on governments if rupee exchange rate vis-à-vis dollar is high.
Quite ironically, budget allocation for interest payment is Rs 1.36 trillion, which is higher than the allocation for the PSDP. This is more than one-third of our budgeted expenditure
The effect of this policy of keeping rupee exchange rate over-valued has been a reduction in the competitiveness of Pakistani exporters. An over-valued rupee has rendered Pakistan’s exports dearer for the world and has contributed to an already well-entrenched export crisis. While Pakistani exporters routinely complain about an over-valued exchange rate, Indian and Bangladeshi exporters have largely taken over global export orders that once came to Pakistan.
While on one hand this policy has reduced exports, it has also been responsible for Pakistan’s failure to reap benefits from low global price of crude oil. Oil import bill is the major outflow of foreign exchange in Pakistan. Pakistan’s oil import bill increased even when global price for oil went under. Lower export and a rising oil import bill have worsened Pakistan’s balance of payment situation to astronomical levels.
PML-N government has maintained stability in rupee exchange rate through increasing foreign exchange reserves by borrowing foreign money. Every tranche of the $6.6 billion under IMF’s Extended Funds Facility (EFF) has gone to building foreign exchange reserves to some extent. Even the Rs one trillion PSDP fund is largely fuelled by borrowed money. Most of this money comes from domestic sources which include commercial banks.
There are two downsides to borrowing from commercial banks. First, interest rate on loans from commercial banks is more than that on foreign loans which increases the cost of servicing debt. Quite ironically, budget allocation for interest payment in fiscal budget 2017-18 is Rs 1.36 trillion which is higher than the allocation for the PSDP. This translates into more than one-third of budget expenditure. The implication for Pakistan’s social sector is very crucial. Government has to compromise spending on education and health to make room for interest payment.
Pakistan’s achievement in such social sector indicators is already very dismal. Secondly, as government borrows money from commercial banks it eats up the amount of money available for private sector. Private sector credit is important for the smooth functioning of the economic machine. Low availability of private sector credit dents employment opportunities as well.
Short-term economic policies which are shaped by one-time events like political election perversely affect the economy. Policy makers should always adhere to sound economic judgment in framing policies rather than short term whims.
The writer is an Adjunct Scholar at Policy Research Institute of Market Economy, an independent public policy think tank based in Islamabad