The Wrong Defence Budget

Defence Budget of Pakistan

Defence expenditure has almost doubled since last five years. In its latest budget, government has hiked defence spending up to Rs700.2 billion. Even this number does not tell the entire tale, however, as military pensions which have risen to over Rs100 billion are being paid from civilian budget, not defence. This high level of spending is often justified with claims about how Pakistan’s defence spending is the lowest in the region, despite serious national security concerns. But these justifications leave out a critical question which is whether it is even possible for Pakistan to spend its way to security.

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Tie Defence Budget To Results

Pakistan military systems

Defence Ministry has requested another increase in funds for military budget. This is not a surprise, actually, defence budget is raised every year and it will be raised again this year, too. This year, however, the government should make a change that would have a great impact in ensuring both the national security and the economic security of the nation: Tie the defence budget to results.

Pakistan faces real and immediate security threats. According to Air Vice Marshal Arshad Qudoos, “More funds are required for acquisition and mobilisation of new weapon systems”.  By tying the defence budget to results, we could be assured that those weapon systems were the ones actually needed to secure the country. Even more important, the military would have a strong incentive to focus on immediate threats instead of ideological or imagined ones.

The idea might sound surprising, but it shouldn’t. Pakistan is not China or America with trillions dollar budgets to divide among state agencies.  Chairman Senate Committee on Defence Senator Mushahid Hussain called for more accountability on Monday, saying that ‘People deserve to know how the defence budget is prepared and utilised’.

Knowing how the defence budget is prepared and utilised is important, but without the final element of accountability for actual results, that knowledge is meaningless. Tying the defence budget to actual results will cause national security and economic security to improve.

Putting our priorities in order

defense government-budgets-education-vs-military-spending

India is the world’s largest arms importer. It is also the third largest economy in the world. Pakistan has increased its purchased by 119 per cent, making it the third largest arms importer, just behind China. By contrast, though, Pakistan has the 27th largest economy in the world.

It’s not just arms imports that we spend a disproportionate amount of money on, it’s military spending in general. In one of it’s first acts after taking power, the PML-N government increased defence spending by 15 per cent, or Rs82 billion. This is about 3 percent of GDP, which means Pakistan has the 20th largest military expenditure as a percentage of GDP. By comparison, India spends less than 2.5 percent of GDP on military expenditures, ranking at number 32 of the world.

But the point here isn’t really whether or not an arms race with India is a winnable match (it isn’t). The point is that, while we are both spending billions on military expenditures, our nation is becoming less and less secure.

It has become close to accepted among much of the population that there is no purely military solution to terrorism. Whether or not one believes that military has any role to play (something even Imran Khan has come around to believe), the Americans experiment in Iraq taught us that you cannot kill terrorism away, you have to defeat terrorism through education and economic development.

In the latest budget, however, education is still not a priority, accounting for only 8 percent of spending – so small it doesn’t even show up on most charts. Health programmes also receive substantially less from the national treasure, accounting for only Rs9.9 billion. Meanwhile, polio, a disease wiped out in most of the rest of the world, is on the rise in Pakistan. And unemployment is set to increase this year and remain high for at least 5 years.

And don’t expect Nawaz’s secret billion dollar deals with Saudi Arabia to improve matters.

Pakistan’s new army chief, General Raheel Sharif, also met King Abdullah and top Saudi military commanders during a trip to the kingdom two weeks before the new account was set up.

It’s time to put our priorities in order. Instead of mortgaging the country to buy tanks and missiles, let’s spend billions on health and education. Instead of being 3rd largest arms importer, let’s become first largest importer of books. Every year we pour more and more of the national treasure into the military, and every year we become less and less secure. It’s time to try something different.

How not to negotiate with the IMF

Following is a post published in Express Tribune. Writer can be reached at pervez.tahir@tribune.com.pk

Negotiating a programme with the IMF has always been very difficult for Pakistan. More so, when we are seen to be desperately discussing an urgently needed bailout package. That is why, perhaps, the ongoing negotiations in Islamabad had seemed so difficult. To understand these difficulties, let us step back a little. During the election campaign, the venerable Sartaj Aziz had said: “Right now, you can’t reach an agreement with the IMF because the kind of conditions they would impose on you would not allow you to grow. But if our economic revival package starts working in two months, three months’ time, and it is clear that exports are picking up, our revenues are going up, then you need much less adjustment than indicated by the present situation.”

Dar ignored this sane piece of advice. First, he presented a budget with a deficit of 6.3 per cent. There is no way the IMF could stomach a fiscal deficit target beyond four to 4.5 per cent. It could have been fixed around five per cent anyway if: 1) the government had not increased the Public Sector Development Programme by 50 per cent to accommodate its politically motivated programmes; 2) it had not surrendered to the bureaucracy’s demand to increase salaries and pensions by 10 per cent; and 3) eliminated tax exemptions on its own. Instead of finalising its own energy plan first, the IMF was allowed to dictate the end of power subsidies within a tight time frame. It does not take kindly even to the lifeline tariff for the smaller consumers, the preference being for conditional cash transfers. Unfortunately, the State Bank of Pakistan also made a political statement by announcing a cut in the policy rate at a time when core inflation is still running above headline inflation. Worst of all, the finance minister announced on the floor of parliament that Pakistan needed the new IMF loan just to repay the earlier loan from the same institution. By implication, the intent was not reform but access to ready cash.

Like the hero in Punjabi films, he unleashed a series of economic barhaks from the word go. “Programme or no programme, we shall not impose further taxes.” It was pointless to make a request, if this was a non-negotiable position. The IMF knows enough about the capacity of the Federal Board of Revenue to reject the position that it can collect the desired revenue by toning up its administration. Millions of dollars poured in it by donors have made little impact on its governance. The SROs, lax audits and the slow pursuit of cases against tax delinquents are part of a culture that defies all reform.

Dar said he would negotiate, not beg. There was a needless invocation of national interest. In the same breath, he warned that the country could be reduced to a banana republic if the IMF did not help. The thought that he could negotiate without being flexible, bordered on the ridiculous. “I need six months to turn around the economy, but my problem is that the country has to return a substantial amount to the IMF soon,” he went on to claim. While there is no magic wand to turn the economy around in such a short span, a sounder budget and an austere balance of payments, together with some elements of the so-called plan “B”, would have provided the breathing space to stabilise the economy. It would have also prepared better ground for negotiating a deal with the IMF. However, the PML-N’s structural weakness — a bias against taxation and towards imports — has come in the way. It had promised an economic blast. What we have, thanks to Dar’s irrational exuberance, is an IMF drone. Is it any wonder that Secretariat Block Q was declared out of bounds to the media?

Published in The Express Tribune, July 5th, 2013.

Why The IMF – M.Ziauddin

The writer for this post is Executive Editor of The Express Tribune

More than 99.9 per cent of our population would perhaps find it almost impossible to grasp, in clear terms, what is meant by the phrase “tax-to-GDP ratio” or why we need to rush to the IMF every now and then, missing completely, therefore, the connection between this strange sounding phrase and the begging bowl that has now become our perpetual oxygen tent. But our rich, who make up a minuscule part of even less than one per cent of our population, understand very well what the phrase means, why we need an IMF bailout so very often and what is the relationship between the two. The reason why our rich comprehend the issue better than the rest of the population is inherent within the very process through which they have continuously succeeded in cornering the national wealth.

Since most of our rich do not fall in the category of true entrepreneurs, they have, therefore, consistently failed to understand that by not paying their national dues, and at the same time, by indulging in pilferage of utilities like power, gas and water, they are only jeopardising the chances of their own growth and risking self-destruction in due course of time, if by that time, their shenanigans have not destroyed the very country that has offered them such vast opportunities to write so many rags-to-riches stories. Interestingly, most of these rags-to-riches stories are not the usual tales of trials and tribulations, or accounts of high risks and high profits or mental epics of when and where to invest. Almost all such stories in Pakistan are more or less anecdotes of having the right connections, nepotism and favouritism and of out and out corruption, promoting rent-seeking.

We started with permits and licences. The well-connected made millions by simply selling the official paper. Next came, vertical and horizontal monopolies flowing out of the private banking sector concentrated in the hands of a few families. This was preceded immediately by the bounties generated by the Pakistan Industrial Development Corporation, which used to set up industries in lucrative sectors, make them profitable and then sell them at throwaway prices to the well-connected. Around this time, state-run banks were providing 75 per cent of the equity for investment to people with the right connections. Even before the launch of the unit, the sponsors would retrieve their part of the equity by floating shares and then buying them back after manipulating the market to depress their prices to next to nothing. And even before the first batch of goods went out of their factories, they would have pocketed huge profits by over-invoicing imported machinery. And many would make millions routinely by siphoning off investments in the loan-burdened units and declaring them bankrupt.

Even the nationalisation phase of the 1970s did not curb their rent-seeking habits. While nationalisation soon turned into bureaucratisation, the incoming military regime of General Ziaul Haq returned many of the nationalised units back to their owners almost for nothing. In some cases, the buyers were allowed to borrow from nationalised banks without any collateral to buy nationalised units. And when the denationalisation spree was launched in the 1990s, highly profitable public-sector units were sold for a pittance and since then, the amount of tax these units used to pay has gone down considerably.

Every time an attempt is made to make them pay their dues, the big business would get the urban-based media to focus on exemptions allowed on income from agriculture, while at the same time, it would use this very concession to increase its own quantum of tax avoidance. In fact, the two — the big business and the agriculturists — have contributed equally to keep our tax-to-GDP ratio so low. Between the two, they have cornered our entire economy and using this clout, they have bought off both the establishment and the political parties. So, whether you have a military regime or an elected civilian government, the two moneybags would continue to call all the economic shots and that is the reason why our tax-to-GDP ratio continues to remain so pathetic and we continue to need the IMF’s oxygen tent to escape default.

Published in The Express Tribune, July 3rd, 2013.