Pakistan in need of money

I.M.F. BAILOUT CONSIDERED: Education, poverty eradication take a back seat as funds are misallocated

PAKISTAN is in the news again. Since the shutting of the North Atlantic Treaty Organisation route to Afghanistan more than six months ago, the latest development concerns the fee per United States lorry.

Pakistan Foreign Minister Hina Rabbani Khar claimed they did not close the route to leverage a price advantage. But it may have appeared as sudden potential income: the fee used to be US$250 (RM780). Pakistan is now asking for US$5,000 for the same container, claiming they must ask for the right price.

Why wasn't the right price fixed from the beginning? After all, it was "only" six months ago.

Maybe the government is in desperate need of money to run the country -- more so when the fiscal budget 2012-13 announced on May 30 had more expenditures than revenues and with the general elections due by February next year, with the current government not assured to win.

Pakistan, as it stands this year, fits a textbook development economic case study. The national budget should, therefore, reflect the needed economic development approach. But it does not.

Pakistan has South Asia's highest population growth (170 million population, 295 million by 2050), birth and fertility rates, matching Sub-Saharan Africa.

Two-thirds of the population is less than 30 years old, a number only surpassed by Yemen. Half of the men are illiterate; two-thirds of the women cannot even write their name.

National literacy rate is 49.9 per cent compared to 61 per cent in India, 49 per cent in Nepal, 43 per cent in Bangladesh and above 90 per cent in Sri Lanka.

Pakistan stands 145th out of 187 on the Human Development Index 2011. Education does not seem to be a priority for the government, with less than two per cent of the budget over 2011-12.

Education expenditures have been in constant decline since 2009 (not to mention health expenditures). When you know how important education is to build up a country and its next generation of leaders, you worry about the country's future.

On the other hand, a lot of pre-election expenditures are going to be front-loaded. Civil servant pay and pensions have been increased by 100 per cent over the past four years, and an additional 20 per cent has just been promised.

The expenditures allocated for maintenance of the prime minister's house garden will be increased by 39 per cent. His travel expenses will also benefit from a 52 per cent increase and the meeting expenses at the House, 28.6 per cent, compared to last year's budget.

It seems that all this is much more important than education or poverty alleviation (49 per cent of the population live below the poverty line) and particularly irrelevant when calling for austerity.

In short, there is an obvious misallocation and diversion of resources here (please note that I have not mentioned anything related to debt service or defence allocation, which is not part of the "Pink Book" where all the budget allocations can be found).

The non-debt and non-military current expenditures are the smallest share of the budget.

Fiscal policy, the heart of the revenue collection mechanism, is also in dire straits. Fiscal deficit currently stands at 7.4 per cent.

The present system cannot help to sustain the level of public debt which the government is going to deepen further.

The tax-to-Gross Domestic Product ratio is below 10 per cent, one of the lowest in the world (average is 13-18 per cent). Tax from agricultural income is non-existent, many among the highest income classes close to the political circle are exempted from taxes while businessmen manage to get special government exemptions.

Pakistan has also entered the classic debt-trap, when additional taxes are no longer sufficient to pay for the debt servicing alone.

Foreign direct investments are not coming in and will not do so soon -- not only because of political uncertainty, but also because the epic mismanagement of electric power supply within Pakistan over the last four years is now immeasurably afflicting not only industry but also all the daily matters.

The country has entered into "circular debt" caused by low tax collection and ending with the government defaulting on the energy bill. To make the matter worse, the just-appointed new prime minister, Raja Pervez Ashraf to replace Yousuf Raza Gilani, faces corruption allegations for getting kickbacks in rental power when he was minister of water and power.

It's no surprise that Pakistan is considering calling for another International Monetary Fund rescue package.

But since IMF is not a popular option in Pakistan, the government is looking at any alternative source of fresh money before making the move. And at the moment, the obvious opportunity could be linked to the US-Pakistan talks over the Nato route issue.

Pakistani religious students taking the annual examination at Jamia Binoria Islamic seminary in Karachi. Education expenditure has declined steadily since 2009. AP pic

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