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Ministry of Finance in 1989: Performance Report.

The Federal Ministry of Finance Government of Pakistan has brought out a new publication which shows the performance of this Ministry in 1989. In fact, the democratically elected Government of the Pakistan People's Party completed one year and one month at the end of 1989 in office. Full calendar year 1989 was the responsibility of the newly elected Government at the Centre. Ministry of Finance is one of the most important Ministries of the Federal Government and its financial and economic policies play a very important role in the entire national life right from employment of human resources and social welfare of the people to national defence.

The economic analysis in this publication covers three major fields, namely:

1. Budget and Fiscal Policy,

2. Monetary and Credit Policy; and

3. Trade and Balance of Payments.

In each of the above three fields, three aspects of the problem have been explained, namely the situation in December 1988. performance during 1989 and outlook for the future. Besides, for the first time in the history of Pakistan, the relations with the International Monetary Fund and agreements with that agency have been explained. These relations are not new and have remained on record since Pakistan became a member of the World Bank and the International Monetary Fund. However, so far these relations and the agreements between the Government of Pakistan and the IMF have been considered an official secret. Their disclosure, of course is a new thing. This should continue is future and in fuller details.

Budget and Fiscal

Policy

The problem of budgetary deficit, increasing deficit financing and mounting debt service payments has been gathering momentum for more than a decade adn is now a most serious problem of the country. In 1987-88, fiscal deficit had gone upto Rs. 57.6 billion which was 8.6 per cent of the gross domestic product. According to the present publication bank borrowing totalled Rs. 13.7 billion in that year. In the beginning of December 1988, bank borrowing stood at Rs. 8.5 billion. The new Government claims to have taken fiscal measures to overcome the problem of budgetary deficit.

Major thrust of the government fiscal measures was to improve tax collection along with expansion of additional tax and duty levies and reduction in expenditure. The government had launched a 3-year medium term programme of adjustments and reforms. Major objective of this programme is to reduce the overall budget deficit from Rs. 57.6 billion or 8.6 per cent of GDP in 1987-88 to Rs. 53 billion or 4.8 per cent of DGP in 1991-92. Some immediate measures were taken in this connection in the Federal Budgets for the years 1988-89 and 1989-90 as shown in the table below.

Specific measures taken to achieve this reduction include:-

(i) Mobilization of additional resources of Rs. 9.3 billon from taxes and other revenue receipts;

(ii) Reduction of Rs. 2.7 billion in current expenditure;

(iii) Generation of resources and re-duction in subsidies by adjustment in administered prices; and

(iv) Improvement in revenue collection.

Consolidated Fiscal Position 1988-89 and 1989-90

(Rs. in billion)
Particulars 1988-89 1989-90 % increase
1. Revenue 139.9 155.5 11.2
2. Expenditure 198.7 216.6 9.0
 (i) Non-Development 152.1 162.7 7.0
 (ii) Development 46.6 53.9 15.7
3. Overall Deficit 54.2 56.0 3.3
 (As % of GDP) (6.7) (6.0)


Expenditure control measures are very important as non-development expenditure of the government has increased very sharply and it is a great burden on the Central and Provincial Budgets. Drastic measures are needed to achieve any tangible results. Limited measures are not enough. In the 1989-90 Budget, the expenditure on Civil Administration was initiated to be reduced by Rs. 2.7 billion through economy measures and reducing avoidable expenditure. Defence expenditure was increased by 1.2 per cent only in nominal terms and if increase in prices is taken into account, there should be sizeable reduction in the real size of the Defence expenditure.

On the development side, the expenditure has been allowed to increase by 16.7 per cent. Special attention has been paid to the social sectors like housing, health and education. However, the requirements of physical infrastructure like power, transport and communications and production sectors like agriculture, mining and manufacturing continue to suffer. At present, manufacturing appears to be the most disappointing sector of the economy. It is being affected seriously, inter alia, by the law and order situation of the country.

The new government has started a new People's Works Programme, to replace in a way, the Five Point Programme of former Prime Minister Muhammad Khan Junejo. For this programme, a non-lapseable development provision of Rs. 2 billion in 1988-89 and Rs. 3 billion in 1989-90 were made. In order to strengthen the educational programme an additional sum of Rs. 1 billion was provided. However, there is one serious handicap with the Peoples' Works Programme that due to non-cooperation between the Federal Government and two Provincial Governments, it is not proceeding smoothly and throughout the country. Some of the economy measures introduced by the new government include as shown below:-

1. Expenditure of Ministries is reviewed each month and remedial measures are taken to obviate budgetary excesses.

2. A ban on creation of new posts has-been imposed and powers delegated to the Ministries for creation of temporary posts have been withdrawn; and

3. Instructions have also been issued to Ministries to enforce economy measuresand to cut expenditure on certain items by half which include expenditure on newspapers, periodicals and entertainment.

4. The public sector enterprises suffering losses are being restrucured, to put themback on feet and make them economically viable. Some of the enterprises are Heavy Mechanical Complex, Heavy Forge and Foundry, Larkana SugarMill and Pakistan National Shipping Corporation. In addition, the Ministry of Finance has agreed to provide financial relief for the revival of Pak-Iran Textile Mills Ltd. (PITL) which will be replaced by a new joint venture company with fresh equity provided by the government of Iran. Technical assistance has been sought from the Asian Development Bank to study the rest and suggest their disposal/sale.

Efforts made to increase revenue receipts by the newly elected government are quite comprehensive although much more could be done. These include increase in revenue of Rs. 6.7 billion through taxes and Rs. 2.6 billion from other receipts. Measures include (i) withdrawal of certain income tax exemption, (ii) levy of capital value tax on purchase of cars and houses; (iii) rationalization of customs tariff; (iv) introduction of general sales tax as a precursor of launching of the modern concept of value added tax; and (v) surveillance of tax collection. As a result, the revenue receipts during July-December 1989 were 19.6 per cent higher than during the same period of 1988.

Money and Credit Policy

The credfit policy aimsat restoration of financial stability as well as price control. In 1987-88, money supply expanded by 11.2 per cent because of borrowing Rs. 13.7 billion as budgetary support and inflationary presure built up in 1988-89. In 1988-89, monetary expansion was restricted to 4.7 per cent and rate of inflation was reduced. the trend of consumer price index is given below:

Cummulative change in Consumer

Price Index (% increase)
July-November, 1988 7.2
December-June, 1989 0.9
July-November, 1989 4.2


For 1989-90, expansion of money is intended at 10.9 per cent and credit at 9 per cent. During July-November 1989, money supply increased by 4.3 per cent and credit by 6.5 per cent. In this, it is noteworthy that credit for budgetary support increased by Rs. 1 billion and for private sector Rs. 10.8 billion. In order to improve the health of the banking system, the government plans to strengthen the legal framework for debt recovery, to recapitalize and restructure government owned financial institutions, privatization of some of these institutions and promote competition by allowing the establishment of private investment finance companies. Eight private investment finance companies have been sanctioned one of which has already started operation.

Trade and Balance of Payments

No doubt, trade and balance of pragmatic are under pressure and highly payments policy is needed to overcome the problem. In 1988-89, exports increased by 4.6 per cent and imports by 11.2 per cent. Home remittances declined by 5.7 per cent and current account deficit was $ 1.96 billion. During the first half of 1989-90 the position was worse as during the first five months, exports increased by 1.5 per cent and imports by 4.4 per cent. However, home remittances increased by 16.1 per cent. Current account deficit in 1989-90 might be equal to that of 1987-88.

Some of the measures being adopted by the Government are given below:

1. To increase exports and reduce non-tariff barriers as well as the level and dispersion of import tariffs;

2. Flexible exchange rate management in support of trade liberalization, and growth and fiversification of exports;

3. Industrial Policy reform to promote manufactured-exports and attract foreign direct investment;

4. Reduction in exchange restrictions; and

5. Rational external borrowing policies.

Three Year Programme

The three year Medium Term Structural Programme (1988-89 to 1990-91) will witness strong fiscal measures as shown below:

1. Further reduction in the overall budget deficit by increasing revenues and a Smoderated growth in expenditure;

2. Broad-basing the taxation system;

3. Rationalization of import tariffs;

4. Liberalization of trade policy;

5. Continuation of the flexible exchange rate policy;

6. improvement of the working of the financial institutions and development of secondary financial market; and

7. Formation of monetary and credit policy aimed at meeting the growing requirements of the economy with out exerting undue pressure on prices.

These measures are as a result of an agreement concluded with the International Monetary Fund by the previous Government. Present Government continues to implement the provisions of the agreement. The object of this agreement is to rectify the imbalances in the economy which had emerged from weak fiscal and monetary policies. The objectives of the Programme are (i) to increase production, (ii) to reduce fiscal deficit, (iii) to make efficient resource allocation; (iv) to improve balance of payments; and (v) to continue deregulation of the economy.
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Article Details
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Author:Khan, Abdul Majid
Publication:Economic Review
Article Type:Book Review
Date:Mar 1, 1990
Words:1717
Previous Article:Saudi Arabia: Pakistan's trade partners.
Next Article:Economic Survey 1988-89: Statistical Supplement.
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